CHAPTER 15 PROBLEMS
1. Calculating Interest. Calculate the annual interest and the semiannual interest payment for the
following corporate bond issues with a face value of $1,000.
Annual Interest
Rate
Annual Interest
Amount
Semiannual Interest
Payment
5.30
$53.00
$26.50
6.10%
$61.00
$30.50
6.0%
$60.00
$30.00
7.40%
$74.00
$37.00
2. Analyzing convertible bonds. Jackson Metals, Inc issued a $1,000 convertible corporate bond. Each
bond is convertible to 40 shares of the firm’s common stock.
a. What price must the common stock reach before investors would consider converting their bond to
common stock?
In order for investors to convert this bond to common stock, the stock price must be $25 or
higher.
$1,000 ÷ 40 shares = $25.
3. Determining the approximate market value for a bond. Approximate the market value for the
following $1,000 bonds:
Bond interest rate = 6%, current rate = 5%
Bond interest rate = 5.2%, current rate = 6.4%
Approximate annual value = Dollar amount of annual interest / Comparable interest rate
(.06 x $1,000) / .05 = $1,200
(.052 x $1,000) / .064 = $812.50
4. Calculating total return. Jean Miller purchased a $1,000 corporate bond three years ago for $910. The
bond pays 5 percent annual interest. Three years later, she sold the bond for $1,010. Calculate the
total return for Ms. Miller’s bond investment.
The total return is $250, calculated as follows:
Annual interest = $1,000 x 0.05 = $50
Three years interest = $50 x 3 = $150
Dollar appreciation = $1,010 – $910 = $100
Total return = $150 + $100 = $250