Ch 6 to 8 end of chap Answers

# Ch 6 to 8 end of chap Answers - ^"^ #6-3onpage257,...

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Unformatted text preview: ^"^ #6-3onpage257, Buner Corporation's outstanding bond has the following characteristics: Years to Maturity 6 Couoon rate of interest 8.0Y" Face value \$1,000 If investors require a rate of return equal to l2o/" on similar-risk bonds and interest is paid semiannually, what should be the market price of Buner's bond? Answer: Please start with identification of the five variables: (l) I/Y: the market interest rate (rd) : l2Yo: this is the market interest rate to be used for Buner corporation because the problem says"l2%o on similar-risk bonds." (2) FV: \$1,000: This is Face value: Par value: Principal. Also note that if problems do not specifu the par value, then it is always assumed to be \$1,000. (3) INT : coupon rate + Par value : 0.08 * 1000 : \$80. (4) N :6 years. (5) PV : ?: remember that finding the value of any asset at the current period is equivalent to finding its PV. Caution about the semiannual payment. Hence, you have to convert values as follows: Step l) New INT: Old INT/2: \$80 I 2: \$40. Step 2) New I/Y : Old IIY / 2: 12%o I 2: 6%o. Step 3) New N : Old N*2 : 6*2: 12. Therefore, 4OPMT 6IN IOOO FV 12 N CPT PV ) 832.32 "n={#].''*[#] = 40(8.38384) +1,000(0.49697) = 335.3538 +496.97 =832.32 #6-5 on page257, A corporation has an outstanding bond with the following characteristics: Years to Maturifv 8 Current market value \$902.81 Counon rate of interest 6.Oo Face value \$1,000 Interest pavment Semiannuallv What is the yield to maturify (YTIIO for this bond? Answer: Annual INT 1:p141): coupon rate * face value: 0.06 * 1000: \$60. Since interests are paid semi-annually, you have to follow the steps below: Step l) New INT: Old INT/2 : \$60 I 2: \$30. Step 2) New N : Old N*2 : 8*2: 16- 30 PMT 1OOO FV 16 N 902.81+I- PV CPT I/Y (where PMT : coupon rate * face value : 0.06 * 1000 : \$60.) Then you get3.823. However, the YTM is an annual value. Hence you have to multiply by 2. The YTM : 3.823 * 2:7.65 o/o " ^ #6-6 on page 257, Suppose Ford Motor Company sold an issue of bonds with a l0-year maturity, a \$1,000 par value, 10 percent coupon rate, and semiannual interest payments. a. Two years after the bonds were issued, the going rate of interest on bonds such as there fell to 6 percent. At what price would the bonds sell? N: l0 -2:8 years. Since semiannual compounding is used, New N : Old N*2 : 8*2: 16. New I/Y : Old lN 12 : 6Yo/2: 3%o. New (semiannual) INT : Old (annual) INT/2 : 1000*0.1 12: \$50. fr- t I r . -l PV =50'' (r'03)ru l+r-0001 t ,, I L o.o3 ] L(l.03)'" J = 50(12.61 I 02) + l, 000 (0.623 1 7) = 628.05 + 623.17 = 1,25 I .22 b. Suppose the interest rate remained at 6 percent for the next eight years. What would happen to the price of the Ford Motor Company bonds over time?...
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## This note was uploaded on 09/08/2010 for the course BUS 170 at San Jose State.

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Ch 6 to 8 end of chap Answers - ^"^ #6-3onpage257,...

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