Chapter 7: FINA 2201

A bond pays an annual coupon of $70 on a face value of $1,000. What is its coupon rate (as a percent)?

70 / 1000 = 7%

A $1,000 face-value bond pays an annual coupon of $60 and currently trades for $891. What is the bond's current yield (as a percent)?

60 / 891 = 6.73%

A $1,000 face-value bond pays an ANNUAL coupon at a coupon rate of 8% and matures in 10 years. If the market yield (YTM) is 10%, what is the bond's price?

=PV(.10, 10, -80, -1000)

A $1,000 face-value bond pays a SEMIANNUAL coupon at a coupon rate of 7% (annual) and matures in 8 years. If the market yield (YTM) is 9% (annual, compounded semiannually), what is the bond's price?

=PV(0.09/2, 8×2, -1000×0.07/2, -1000)

A $1,000 face-value, SEMIANNUAL-coupon bond has a 8% annual coupon rate, 12 years to maturity, and a YTM of 6%. What is its price? (Note the coupon rate exceeds the YTM.)

=PV(0.06/2, 12*2, -1000*0.08/2, -1000)

A $1,000 face-value bond has a 6% coupon and currently trades at $920. Compared with the coupon rate, is the bond's YTM higher or lower? Answer +1 if the YTM is HIGHER than the coupon rate, or -1 if the YTM is LOWER than the coupon rate.

=IF(920<1000,1,-1)

A taxable corporate bond yields 8.4%. For an investor in the 32% marginal tax bracket, what is the AFTER-TAX yield (as a percent)?

8.4% x (1 - 0.32)

A tax-free municipal bond yields 5.9%. For an investor in the 32% marginal tax bracket, what TAXABLE yield would be equivalent (deliver the same after-tax income)? Answer as a percent.

5.9% / (1 - 0.32)

A taxable corporate bond yields 8.4% and a comparable tax-free municipal bond yields 5.9%. At what marginal tax rate is an investor INDIFFERENT between the two (the break-even tax rate, as a percent)?

t* = 1 - (5.9 / 8.4)

An investor requires a real rate of return of 4.1% and expects inflation of 3.17%. Using the exact Fisher equation, what NOMINAL rate must the investment offer (as a percent)?

R = (1 + 0.041)(1 + 0.0317) - 1

A bond has a nominal yield of 7.4% and expected inflation is 3.2%. Using the exact Fisher equation, what is the REAL rate of return (as a percent)?

r = (1 + 0.074) / (1 + 0.032) - 1

A $1,000 face-value, SEMIANNUAL-coupon bond has a 6% coupon, 20 years to maturity, and a YTM of 6%. If the YTM suddenly RISES by 2 percentage points (to 8%), what is the percentage change in the bond's price?

P_old = 30/0.03 × [1 - (1.03)^-40] + 1000/(1.03)^40 = $1,000.00

P_new = 30/0.04 × [1 - (1.04)^-40] + 1000/(1.04)^40 = $802.07

% change = (802.07 - 1000) / 1000 = -19.79%