# Valuation of Bonds questions

Respond to the questions and complete the problems.

#### Questions

In a Word document, respond to the following. Number your responses 1–4.

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1. Explain what a call provision enables bond issuers to do. Why would bond issuers exercise a call provision?
2. Define a discount bond and a premium bond. Provide examples of each.
3. Describe the relationship between interest rates and bond prices.
4. Describe the differences between a coupon bond and a zero coupon bond.

Use references to support your responses as needed. Be sure to cite all references using correct APA style. Your responses should be free of grammar and spelling errors, demonstrating strong written communication skills.

#### Problems

In either a Word document or Excel spreadsheet, complete the following problems.

• You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet.
• If you choose to solve the problems algebraically, be sure to show your computations.
• If you use a financial calculator, show your input values.
• If you use an Excel spreadsheet, show your input values and formulas.

Compute the following:

1. Assuming semi-annual compounding, what is the price of a zero coupon bond that matures in 3 years if the market interest rate is 5.5 percent? Assume par value is \$1000.
2. Using semi-annual compounding, what is the price of a 5 percent coupon bond with 10 years left to maturity and a market interest rate of 7.2 percent? Assume that interest payments are paid semi-annually and that par value is \$1000.
3. Using semi-annual compounding, what is the yield to maturity on a 4.65 percent coupon bond with 18 years left to maturity that is offered for sale at \$1,025.95? Assume par value is \$1000.

# Valuation of Bonds Scoring Guide

CRITERIA NON-PERFORMANCE BASIC PROFICIENT DISTINGUISHED
Explain what a call provision enables bond issuers to do. Does not explain what a call provision enables bond issuers to do. Explains what a call provision enables bond issuers to do but omits key elements. Explains what a call provision enables bond issuers to do. Analyzes what a call provision enables bond issuers to do and connects the analysis to relevant real-world situations.
Explain why bond issuers would exercise a call provision. Does not explain why bond issuers would exercise a call provision. Explains why bond issuers would exercise a call provision but omits key elements. Explains why bond issuers would exercise a call provision. Analyzes why bond issuers would exercise a call provision and connects the analysis to relevant real-world situations.
Define a discount bond and a premium bond. Does not define a discount bond or a premium bond. Defines a discount bond and a premium bond but omits key elements. Defines a discount bond and a premium bond. Defines a discount bond and a premium bond and connects the definitions to relevant real-world examples.
Describe the relationship between interest rates and bond prices. Does not describe the relationship between interest rates and bond prices. Describes the relationship between interest rates and bond prices but omits key elements. Describes the relationship between interest rates and bond prices. Analyzes the relationship between interest rates and bond prices and connects the analysis to relevant real-world situations.
Describe the differences between a coupon bond and a zero coupon bond. Does not describe the differences between a coupon bond and a zero coupon bond. Describes the differences between a coupon bond and a zero coupon bond but omits key elements in the description. Describes the differences between a coupon bond and a zero coupon bond. Analyzes the differences between a coupon bond and a zero coupon bond and connects the analysis to relevant real-world situations.
Calculate the price of a zero coupon bond. Does not calculate the price of a zero coupon bond. Calculates the price of a zero coupon bond using inaccurate or incomplete data. Calculates the price of a zero coupon bond. Calculates the price of a zero coupon bond and explains the calculation.
Calculate the price of a coupon bond. Does not calculate the price of a coupon bond. Calculates the price of a coupon bond using inaccurate or incomplete data. Calculates the price of a coupon bond. Calculates the price of a coupon bond and explains the calculation.
Calculate the yield to maturity on a coupon bond. Does not calculate the yield to maturity on a coupon bond. Calculates the yield to maturity on a coupon bond using inaccurate or incomplete data. Calculates the yield to maturity on a coupon bond. Calculates the yield to maturity on a coupon bond and explains the calculation.

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