KP_Ch8HWSolns

# KP_Ch8HWSolns - Created by Babu G Baradwaj For Kidwell...

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Created by : Babu G. Baradwaj Instructor Manual Created on: Jan. 18, 2007 Chapter 8 For: Kidwell & Parrino Principles of Financial Management Revised EOC # 02 VIII. Questions and Problems Basic 8.1. Bond Price: BA Corp is issuing a 10-year bond with a coupon rate of 8 percent. The interest rate for similar bonds is currently 6 percent. Assuming annual payments, what is the present value of the bond? Solution: Years to maturity = n = 10 Coupon rate = C = 8% Annual coupon = \$1,000 x 0.08 = \$80 Current market rate = i = 6% Present value of bond = P B 0 1 2 3 4 5 6 10 ├───┼────┼───┼───┼───┼────┼── ─────┤ \$80 \$80 \$80 \$80 \$80 \$80 \$80 \$1,000 n=10; C = 8%; i = YTM = 6% \$1,147.20 = + = + - × = + + + - × = + + + + + + + + + = 39 . 558 \$ 81 . 588 \$ ) 06 . 1 ( 000 , 1 \$ 06 . 0 ) 06 . 1 ( 1 1 80 \$ ) 1 ( F ) 1 ( 1 1 C ) 1 ( F C ) 1 ( C ) 1 ( C ) 1 ( C P 10 10 n n 10 10 3 3 2 2 1 1 B i i i i i i i 8.2. Bond Price: Pierre Dupont just received a gift from his grandfather. He plans to invest in a five-year bond issued by Venice Corp that pays annual coupons of 5.5 percent. If the current market rate is 7.25 percent, what is the maximum amount Pierre should be willing to pay for this bond? Solution: 1

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Created by : Babu G. Baradwaj Instructor Manual Created on: Jan. 18, 2007 Chapter 8 For: Kidwell & Parrino Principles of Financial Management Revised EOC # 02 Years to maturity = n = 5 0 1 2 3 4 5 ├───────┼────────┼───────┼────────┼───────┤ \$55 \$55 \$55 \$55 \$1,055 n = 5; C = 5.5%; i =YTM=7.25% Coupon rate = C = 5.5% Annual coupon = \$1,000 x 0.055 = \$55 Current market rate = i = 7.25% Present value of bond = P B \$928.72 = + = + - × = + + + - × = 72 . 704 \$ 01 . 224 \$ ) 0725 . 1 ( 000 , 1 \$ 0725 . 0 ) 0725 . 1 ( 1 1 55 \$ ) 1 ( F ) 1 ( 1 1 C P 5 5 n n B i i i 8.3. Bond Price: Knight Inc. has issued a three-year bond that pays a coupon of 6.10 percent. Coupon payments are made semiannually. Given the market rate of interest of 5.80 percent, what is the market value of the bond? Solution: Years to maturity = n = 3 Coupon rate = C = 6.1% Frequency of payment = m = 2 Semi-annual coupon = \$1,000 x (0.061/2) = \$30.50 Current market rate = i = 5.8% Present value of bond = P B 0 1 2 3 4 5 6 ├───┼────┼───┼───┼───┼────┤ \$30.50 \$30.50 \$30.50 \$30.50 \$30.50 \$30.50 \$1,000 2
Created by : Babu G. Baradwaj Instructor Manual Created on: Jan. 18, 2007 Chapter 8 For: Kidwell & Parrino Principles of Financial Management Revised EOC # 02 n=3; m=2; C = 6.1%; i = YTM = 5.8% ( 29 ( 29 \$1,008.15 = + = + - × = + + + - × = 38 . 842 \$ 77 . 165 \$ ) 029 . 1 ( 000 , 1 \$ 029 . 0 ) 029 . 1 ( 1 1 50 . 30 \$ 2 1 F 2 1 1 1 2 C P 6 6 n 2 n 2 B i 2 i i 8.4. Bond Price: Regatta Inc. has seven-year bonds outstanding that pay a 12 percent coupon rate. Investors buying the bond today can expect to earn a yield-to-maturity of 8.875 percent. What should the company’s bonds be priced at today? Assume annual coupon payments.
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• Parrino, Kidwell, Babu G. Baradwaj, Instructor Manual Chapter

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