Solutions(Chapter7) - University College of the Cayman Islands FIN301 Financial Management Tutorial 8 Bond Valuation Chapter 7(Note With respect to

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University College of the Cayman Islands FIN301 Financial Management Tutorial 8 - Bond Valuation – Chapter 7 ( Note – With respect to the textbook questions, the solutions for the ones that require the yield to maturity are presented in financial calculator format and/or straight trial and error format. Additionally, the non-text book solutions for the YTM questions are presented using linear interpolation . However, you may use the Rodriques formula to do all of them, even in the exams! ) 1. M = $1,000; I = $1,000 x 8% = $80; P b = I(PVIFA k%,n )+ M(PVIF k%,n ) = $80(PVIFA 12%,12 ) + $1,000(PVIF 12%,12 ) = $80(6.1944) + $1,000(0.2567) = $495.55 + $256.70 = $752.25 2. 8-1 With your financial calculator, enter the following: N = 10; I = YTM = 9%; PMT = 0.08 × 1,000 = 80; FV = 1000; PV = V B = ? PV = $935.82. Alternatively, V B = $80(PVIFA 9%, 10 ) + $1,000(PVIF 9%, 10 ) = $80(6.4177) + $1,000(0.4224) = $513.42 + $422.40 = $935.82. 3. 8-5 The problem asks you to find the price of a bond, given the following facts: N = 16; I = 8.5/2 = 4.25; PMT = 45; FV = 1000. With a financial calculator, solve for PV = $1,028.60. Or V B = $45(PVIFA 4.25%, 16 ) + $1,000(PVIF 4.25%, 16 ) = $45(11.4403) + $1,000(0.5138) – Note that you have to use the algebraic format of the PVIFA and PVIF, respectively. = $514.81 + $513.80 = $1,028.61 1
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4. M = $1,000; I= P b = I / m (PVIFA k%/m,nn )+ M(PVIF k%/m,nm ) = $90 / 2 (PVIFA 8%/2, 8 x 2 ) + $1,000(PVIF 8%/2, 8 x 2 ) = $45(PVIFA 4%,16 ) + $1,000(PVIF 4%,16 ) = $45(11.6523) + $1,000(0.5339) = $524.35 + $533.90 = $1,058.25 P b = I(PVIFA k%,n )+ M(PVIF k%,n ) = $90(PVIFA 8%,8 ) + $1,000(PVIF 8%, 8 ) = $90(PVIFA 8%,8) + $1,000(PVIF 8%,8 ) = $90(5.7466) + $1,000(0.5403) = $517.19 + $540.30 = $1,057.49 5. (a) P b = $130(PVIFA 14%,15 ) + $1,000(PVIF 14%,15 ) = $130(6.1422) + $1,000(0.1401) = $798.49 + $140.10 = $938.59 (b) No. The market value is greater than the bond’s intrinsic value. (c) P b = $130(PVIFA 12%,15 ) + $1,000(PVIF 12%,15 ) = $130(6.8109) + $1,000(0.1827) = $885.42 + $182.70 = $1,068.12 The answer is still no ! 6. 8-6 a. V B = I(PVIFA i,n ) + M(PVIF i,n ) 1. 5%: Bond L: V B = $100(10.3797) + $1,000(0.4810) = $ 1,518.97. Bond S: V B = ($100 + $1,000)(0.9524) = $ 1,047.64 . 2. 8%: Bond L: V B = $100(8.5595) + $1,000(0.3152) = $ 1,171.15 . Bond S:
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This note was uploaded on 10/13/2010 for the course USMLE na taught by Professor Na during the Spring '10 term at St. Matthew's University.

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Solutions(Chapter7) - University College of the Cayman Islands FIN301 Financial Management Tutorial 8 Bond Valuation Chapter 7(Note With respect to

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