Ch.7 Problem Solutions

Ch.7 Problem Solutions - CHAPTER 7 7-1 BOND VALUATION...

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CHAPTER 7 7-1 BOND VALUATION Callaghan Motors’ 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? 0 1 2 3 10 9% . . . 80 80 80 80 PV = ? FV = 1,000 ( 29 ( 29 ( 29 ( 29 N d N d d d B k M k INT k INT k INT V value s Bond + + + + + + + + = = 1 1 ... 1 1 ' 2 1 ( 29 ( 29 = + + + = N t N d t d k M k INT 1 1 1 ( 29 ( 29 ( 29 ( 29 10 10 2 1 09 . 1 1000 09 . 1 80 ... 09 . 1 80 09 . 1 80 ' + + + + + + + + = = B V value s Bond ( 29 ( 29 = + + + = = 10 1 10 09 . 1 1000 09 . 1 80 ' t t B V value s Bond With your financial calculator, enter the following: N = 10 I = YTM = 9% PMT = 0.08 x 1,000 = 80 FV = 1000 PV = V B = ? PV = $935.82. 1
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7-2 YIELD TO MATURITY AND CALL Thatcher Corporation’s bonds will mature in 10 years . The bonds have a face value of $1,000 and an 8 percent coupon rate, paid semiannually. The price of the bonds is $1,100. The bonds are callable in 5 years at a call price of $1,050 . What is the yield to maturity? What is the yield to call? _______________________________________________ (a) 0 1 2 3 20 i=? . . . 40 40 40 40 PV= 1,100 FV = 1,000 ( 29 ( 29 ( 29 ( 29 ( 29 20 20 3 2 1 1 1000 1 40 ... 1 40 1 40 1 40 ' d d d d d B k k k k k V value s Bond + + + + + + + + + + = = ( 29 ( 29 = + + + = = 20 1 20 1 1000 1 40 ' t d t d B k k V value s Bond With your financial calculator, enter the following to find YTM: N = 10 x 2 = 20 PV = -1100 PMT = 0.08/2 x 1,000 = 40 FV = 1,000 I = YTM = ? YTM = 3.31% x 2 = 6.62% 4
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(b) 0 1 2 3 10 i=? . . . 40 40 40 40 PV= 1,100 FV = 1,050 ( 29 ( 29 = + + + = = N t N d t d B k ice Call k INT V value s Bond 1 1 Pr 1 ' ( 29 ( 29 = + + + = = 10 1 10 1 1050 1 40 ' t d t d B k k V value s Bond With your financial calculator, enter the following to find YTC: N = 5 x 2 = 10 PV = -1100 PMT = 0.08/2 x 1,000 = 40 FV = 1050 I = YTC = ? YTC = 3.24% x 2 = 6.49% 5
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7-3 BOND VALUATION 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 8.5 percent. What is the price of the bonds? _______________________________________________ 0 1 2 3 16 i=4.25 . . . 40 40 40 40 PV= ? FV = 1,000 ( 29 ( 29 ( 29 ( 29 16 16 2 1 0425 . 1 1000 0425 . 1 45 0425 . 1 45 0425 . 1 45 ' + + + + + + + = = B V value s Bond ( 29 ( 29 = + + + = = 16 1 16 0425 . 1 1000 0425 . 1 45 ' t t B V value s Bond The problem asks you to find the price of a bond, given the following facts: N = 16 I = 8.5/2 = 4.25 PMT = 45 FV = 1,000 With a financial calculator, solve for PV = $1,028.60 6
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7-4 CURRENT YIELD AND YIELD TO MATURITY A bond that matures in 10 years sells for $985. The bond has a face value of $1,000 and a 7 percent annual coupon. a.
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This homework help was uploaded on 04/15/2008 for the course FIN 321 taught by Professor Kelley during the Spring '08 term at Loyola Maryland.

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Ch.7 Problem Solutions - CHAPTER 7 7-1 BOND VALUATION...

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