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FI-360 Homework 3-2

# FI-360 Homework 3-2 - Foundations of Financial Management...

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Foundations of Financial Management FI-360 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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