Demo Qs Topic 3 Part 1 - DEMONSTRATION LECTURE QUESTIONS...

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DEMONSTRATION LECTURE QUESTIONS TOPIC 3 VALUATION Part 1 Question 1 Lisholm Ltd has issued bonds earning a 7 percent coupon rate. The interest is paid semi-annually and the bonds mature in eight years. The bond face value is $1,000. If your required rate of return is 8 per cent, what is the current price of the bond? SOLUTION Question 1 ( 29 74 . 941 $ 91 . 533 83 . 407 ) 04 . 1 ( 1000 04 . 04 . 1 1 35 PV 16 16 = + = + + + - = - - ( 29 n n r FV r r PMT PV - - + + + - = ) 1 ( 1 1
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Question 2 You have just purchased 10 newly issued $100 five year ABC Company Ltd. debentures at par . These debentures pay $6 (per debenture) in interest semi-annually. You are also negotiating the purchase of 10 $100 debentures issued by the DEF Company Ltd. 4 years ago, that return $3 per debenture in semi-annual interest payments and have six years remaining to maturity. What is the maximum price you should offer for the DEF Company Ltd. Debentures, assuming the DEF company is in the same risk class as the ABC company?
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SOLUTION Question 2 Maximum price for def coy debentures The appropriate rate to use is i = 6% per half year Interest Payment p/half year = $3. Principal Payment (Year 6) = $100. ( 29
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Demo Qs Topic 3 Part 1 - DEMONSTRATION LECTURE QUESTIONS...

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