Question

Here are data on $1,000 par value bonds issued by Microsoft, Ford, and Xerox at the end of 2008. Assume you are thinking about buying these bonds as of January 2009. Answer the following questions:

a.) Calculate the values of the bonds if your required rates of return are as follows: Microsoft, 6 percent; Ford, 15 percent; Xerox, 10 percent; where

coupon of interest Microsoft-5.25% Ford-7.125% Xerox-8.0%

Years to maturity Microsoft-30 Ford-25 Xerox-16

b.) At the end of 2008, the bonds were selling for the following amounts:

Microsoft $1,009.00

Ford $610.00

Xerox $805.00

What were the expected rates of return for each bond?

c.) How would the value of the bonds change if (1) your required rate of return (rb) increased 2 percentage points or (2) decreased 2 percentage points?

d.) Explain the implications of your answers in part b in terms of interest rate risk, premium bonds, and discount bonds.

e.) Should you buy the bonds? Explain.

Answer 1

a.) Calculate the values of the bonds if your required rates of return are as follows: Microsoft, 6 percent; Ford, 15 percent; Xerox, 10 percent; where

coupon of interest Microsoft-5.25% Ford-7.125% Xerox-8.0%

Years to maturity Microsoft-30 Ford-25 Xerox-16