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Homework 2

# Homework 2 - Michael Samuels Wilson Homework 2 1 N 20 I 2.5...

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Michael Samuels 2/22/10 Wilson Homework 2 1. N: 20 I: 2.5 FV : 10,000,000 PMT: 300,000 P = \$10,779,458.11 2. In order to make money on this bond I would set the price at \$662.48 or higher N: 540 I: 4/12 PV: 0 FV: 1,000,000 PMT: 662.484 3. NPV(1.5,-4000, {1000,1000,1000,1000,1000,1000,1000,1000}) NPV = \$3,485.92 IRR(-4000,{1000, 1000,1000,1000,1000,1000,1000,1000} IRR = 18.62% 4. I would not purchase the stock under either circumstance as the price of the stock is way overvalued. Price at 10% = 1.35 * 1.1 / (.18-.1) = 18.5625 Price at 12% = 1.35 * 1.12/ (.18-.12) = 25.2 Price = Dividend / Rate - Growth 5. Please answer the following questions, a. What is a callable bond? A callable bond is a bond where the issuer of the bond has the right to buy back the bond at an earlier time at a lower price due to rising interest rates of the bond. b. When would a bond be called ? When the interest rate of the bond is higher than the market the bong could be called.

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Michael Samuels 2/22/10 Wilson Homework 2 c. Who owns the option, i.e. who benefits when a bond is called? The issuer of the bond has the right to call it and obviously would only call in the bond if doing so would benefit them in some way.
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