Problem Set # 12
Solutions
1. A convertible bond has a par value of $1,000, but its current market price is $950. The current price
of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion
premium is _________.
A. $50
B. $190
C. $200
D. $240
Conversion premium = 950 - 40(19) = 190
2. A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has
a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be
__________.
A. $1,000
B. $1,062.81
C. $1,081.82
D. $1,100.03
Calculator entries are N = 16, I/Y = 3, PMT = 35, FV = 1,000, CPT PV
-1,062.81
3.
To earn a high rating from the bond rating agencies, a company would want to have:
I. A low times-interest-earned ratio
II. A low debt-to-equity ratio
III. A high quick ratio
A. I only
B. II and III only
C. I and III only
D. I, II, and III
4. A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in
16 years, it should sell for a price of __________ today.
A. $458.11
B. $641.11
C. $789.11
D. $1,100.11
PV0 =
Calculator entries are N = 16, I/Y = 5, PMT = 0, FV = 1,000, CPT PV
458.11
5. A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with
interest paid annually. If the current market price is $750, what is the capital gain yield of this bond
over the next year?
A. .72%
B. 1.85%
C. 2.58%
D. 3.42%
Calculator entries to find the YTM are N = 10, PV = -750, PMT = 80, FV = 1,000,
CPT = I/Y 12.52
The current yield = 80/750 = 10.67%
Then we use the relationship YTM = Current yield + Capital gain yield
12.52% = 10.67% + Capital gain yield, so Capital gain yield = 1.85%
6. A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific
price after a specific date.
A. callable
B. coupon
C. puttable
D. Treasury
7. You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment
coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ___.
A. .61%
B. -5. 39%
C. 1.28%
D. -3.25%
This year's price is 1,000. since the YTM equals the coupon rate.
Calculator entries for next year's price are N = 7, I/Y = 7, PMT = 60, FV = 1,000,
CPT PV -46.11
At the end of 1 year you'll have 946.11 + 60 = 1,006.11
HPR = 1,006.11/1,000 - 1 = .6107%
8. A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon
payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.)
A. $13.21
B. $12.57
C. $15.44
D. $16.32
(75/2) × (61/182) = $12.57