solutions(Chapter7)

# solutions(Chapter7) - University College of the Cayman...

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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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solutions(Chapter7) - University College of the Cayman...

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