TUTURIAL QUESTION SET THREE 1. WACO Industries 15-year, GH1,000 bonds pay 8 percent interest annually.

The market price of the bonds is GH1,085. a. What is the current yield of this bond?

b. Compute the yield to maturity of this bond. c. Determine the value of the bond to an investor whose required rate of return is 10 percent. d. Should this investor buy this bond? 2. In order to earn interest on your money, you are considering buying a 2-year GH200,000 bond (i.e. the face value is GH200,000) that pays 25% interest semi-annually if your discount rate is 24% p.a. What is the present value of the expected cash flows? 3. Stanley Inc. issues a 15-year GH1,000 bonds that pay GH85 annually. The market price for the bonds is GH960. Investors required rate of return is 9 percent. a. What is the coupon rate and current yield of this bond?

b. What is the value of the bond? c. What is the yield to maturity (YTM) of this bond? d. What happens to the value of the bond if investors required rate of return i. increases to 11 percent or ii. decreases to 7 percent. e. Under which of the circumstances in part (c) should an investor purchase the bond? 4. Comp A Ltd has a 6 percent coupon bond outstanding. Comp B Ltd has a 14 percent bond outstanding. Both bonds have 8 years maturity, make semi-annual payments, and have a YTM of 10 percent. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? What if interest rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of lower coupon bonds?