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fin wk2 problems... - Problem Set I 1 Week 2 Problem Set I...

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Problem Set I 1 Week 2 Problem Set I Barry A. Barfield Jr. FIN 571 Corporate Finance October 13, 2010 Professor: Bill Mellett
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Problem Set I 2 Chapter 5 A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond? A1.(Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond? CALC: n = 10 x 2 r = 9% / 2 PV = ? PMT = 7.4% x 1,000 / 2 = 37 FV = 1,000 PV = -$895.94 A5. (Yield to maturity) New Jersey Lighting has a 7% coupon bond maturing in 17 years. The current market price of the bond is $975. What is the bond’s yield to maturity? The yield to maturity (YTM) is the discounting rate that will make the present value of interest and principal equal to the price today. The interest amount is $70, principal amount is $1,000, time period is 17 years and the price is 975. We can write 975 = 70 X PVIFA (17,rate) + 1,000 X PVIF (17,rate) Solving the equation gives the rate which is the YTM. Manually it is a trial and error method, we use either a financial calculator
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