Valuing Bonds

Introduction

In this assignment, you will learn about bonds and the financial terms used in bond markets. In addition, you will differentiate between discount and premium bonds, identify the factors that influence bond value, and learn how the TVM concept is used to price bonds.

Instructions

Answer the following questions and complete the following problems, as applicable.

You may solve the following problems algebraically, or you may use a financial calculator or Excel spreadsheet. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values. If you use an Excel spreadsheet, show your input values and formulas.

Note: In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.

1. “What does a call provision [call feature] allow [bond] issuers to do, and why would they do it” (Cornett, Adair, & Nofsinger, 2014)?
2. “Provide the definitions of a discount bond and premium bond. Give examples” (Cornett, Adair, & Nofsinger, 2014, p. 178).
3. “Describe the differences in interest payments and bond prices between a 5 percent coupon bond and a zero coupon bond” (Cornett, Adair, & Nofsinger, 2014, p. 178).
4. “Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 6.5 percent” (Cornett, Adair, & Nofsinger, 2014).
   • Assume semi-annual compounding.
5. “Compute the price of a 4.5 percent coupon bond with 15 years left to maturity and a market interest rate of 6.8 percent” (Cornett, Adair, & Nofsinger, 2014).
   • Assume interest payments are paid semi-annually, and solve using semi-annual compounding.
6. “A 6.85 percent coupon bond with 26 years left to maturity is offered for sale at $1,035.25. What yield to maturity [interest rate] is the bond offering” (Cornett, Adair, & Nofsinger, 2014, p. 178)?
   • Assume interest payments are paid semi-annually, and solve using semi-annual compounding.

Submit your completed assignment as an attachment in the assignment area. You may use either a Word document or an Excel spreadsheet for your work, but not both. Prior to submitting your assignment, review the Valuing Bonds Scoring Guide to ensure you have met all of the requirements and as a self-assessment of your work.

Reference

Cornett, M. M., Adair, T. A., & Nofsinger J. (2014). M: Finance (2nd ed.). New York, NY: McGraw-Hill.