**Problem Set on Bond Valuation**

** 1.** Callaghan Motorsâ€™ bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8 percent. The bonds have a yield to maturity of 9 percent. What is the current market price of these bonds?

** 2.** Nungesser Corporation has issued bonds that have a 9 percent coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 9 percent. What is the price of the bonds?

** 3. **The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S a maturity of 1 year (that is, there is only one more interest payment to be made on Bond S).

** a.** What will be the value of each of these bonds when the going rate of interest is

*(1)*5 percent,

*(2)*8 percent, and

*(3)*12 percent?

** b. **Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1-year)?

** 4. **The Heyman Companyâ€™s bonds have 4 years remaining to maturity. Interest is paid annually; the bonds have a $1,000 par value; and the coupon interest rate is 9 percent.

** a.** What is the yield to maturity at a current market price of

*(1)*$829 and

*(2)*$1,104?

** b.** Would you pay $829 for one of these bonds if you thought that the appropriate rate of interest was 12 percent (that is, if r

_{d}=12%)? Explain your answer.