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 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 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
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Created by : Babu G. Baradwaj Instructor Manual Created on: Jan. 18, 2007 Chapter 8 Principles of Financial Management Revised EOC # 02 n=3; m=2; C = 6.1%; i = YTM = 5.8% ( 29 ( 29 $1,008.15 = + = + - × = + +
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This note was uploaded on 10/14/2008 for the course FIN 300 taught by Professor Olander during the Spring '08 term at ASU.

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

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