Chapter 6 homework
July 31, 2012
6.6. Coupon rate: how does bond issuer decide on the appropriate coupon rate to set on its bonds? Explain the difference between the coupon rate and the required return on a bond price?
Coupon rate is the annual coupon divided by the face value of a bond. In this case Bond Issuers look at outstanding bonds of comparable maturity and risk. The yields on such bonds are used to create the coupon rate essential for an exacting issue to initially sell at par. Bond issuers also basically ask possible purchasers what coupon rate would be necessary to attract them. The required return is what investors actually demand on the issue, and it will change through time. The difference between coupon rate and required return are equal only if the bond sells for exactly par.
Questions and problems
Problem # 3
Bond prices: Zevon Inc., has 7 percent coupon bonds on the market that have 8 percent left to maturity. The bonds make annual payments. If the YTM on these bonds is 9 percent, what is the current bond price?
Bond value= C*[1-1(1+r)^t]/r + F/(1+r)^t
= 70*[1-1(1+0.09)^8]/0.09 + 1000/(1+0.09)^8
Problem # 13
Using Treasury quotes: locate the treasury issue in figure 6.3 maturing in June 2023. Is this note or a bond? What is coupon rate? What is its bid price? What was the previous day’s asked price?
Ans. The coupon rate, located in the second column of the quote is 6.25%. The bid price is
Bid price = 128:19 = 128.19/32
Bid price= (128.59375/100)*1000
The previous days ask price is found by:
Previous day’s asked price= Today’s asked price- change
Previous day’s asked price=128.21/32-106/32
Previous day’s asked price=125.34375
The previous day’s price in dollor was:
Previous day’s dollor price=(125.34375/100)*1000