Foundations of Financial Management
FI360
Homework Assignment #3
“Valuations and Rates of Return”
1.
Burns Fire and Casualty Company has $1,000 par value bonds outstanding at
11 percent interest. The bonds will mature in 20 years. Compute the current price
of the bonds if the present yield to maturity is:
a.
6 percent.
b.
8 percent.
c.
12 percent.
A.
6%
PV A= A x PV
IFA
(n = 20, i = 6%)
PV
A
= $110 x 11.470 = $1,261.70
PV = FV x FV
IF
(n = 20, i = 6%)
PV = 1,000 x .312 = $312
$1,261.70
312.00
$1,573.70
B. 8 %
PV
A
= A x PV
IFA
(n = 20, i = 8%)
PV
A
= $110 x 9.818 = $1,079.98
PV = FV x PV
IF
(n = 20, i = 8%)
PV = $1,000 x .215 = $215
$1,079.98
215.00
$1,294,88
C. 12%
PV
A
= A x PV
IFA
(n = 20, i = 12%)
PV
A
= $110 x 7.469 = $821.59
PV = FV x PV
IF
(n = 20, i = 12%)
PV = $1,000 x .104 = $104
$821.59
104.00
$925.59
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2.
Harrison Ford Auto Company has a $ 1,000 par value bond outstanding that pays
11 percent interest. The current yield to maturity on each bond in the market is
8 percent. Compute the price of these bonds for these maturity dates:
a
.
30 years.
b
.
15 years.
c
.
1 year.
A.
30 years
Present Value of Interest Payments
PV
A
= A x PV
IFA
(n = 30, i = 8%)
PV
A
= $110 x 11.258 = $1,238.38
Present Value of Principal Payment
PV = FV x PV
IF
(n = 30, i = 8%)
Appendix B
PV = $1,000 x .099 = $99
$1,238.38
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 Spring '10
 SMITH
 Finance, Interest, Valuation, PVIFA, FV x PVIF

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