week 3 intermediate finance(ANSWER KEY)

week 3 intermediate finance(ANSWER KEY) - Solutions Guide:...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Solutions Guide: Please reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as your own. Chapter 7-Problem 3 Consider Borden’s 83/4 percent bonds that mature on April 15, 2016. Assume that the interest on these bonds is paid and compounded annually. Determine the value of a $1,000 denomination Borden bond as of April 15, 2004, to an investor who holds the bond until maturity and whose required rate of return is a. 7 percent b. 9 percent c. 11 percent a. P o = Σ I/(1 + k d ) t + M/(1 + k d ) n t=1 I = .0875 X 1000 = $87.50 k d = 0.07 M = $1000 n = 12 years (2012 - 2004) 12 P o = Σ 87.50/(1 + 0.07) t + 1000/(1 + 0.07) 12 t=1 = 87.50(PVIFA .07,12 ) + 1000 (PVIF .07,12 ) = 87.50(7.943) + 1000 (0.444) = $1139 (tables and calculator) b. I = $87.50 k d = .09 M = $1000 n = 12 12 P o = Σ 87.50/(1 + .09) t + 1000/(1 + 0.09) 12 t=1 = 87.50 (PVIFA 0.09,12 ) + 1000(PVIF 0.09,12 ) = 87.50(7.161) + 1000 (0.356) = $983 (Tables) $982 (Calculator) c. I = $87.50 k d = .11 M = $1000 n = 12 12
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
P o = Σ 87.50/(1 + 0.11) t + 1000/(1 + 0.11) 12 t=1 = 87.50 (PVIFA 0.11,12 ) + 1000(PVIF 0.11,12 ) = 87.50(6.492) + 1000 (0.286) = $854 (tables and calculator) d. I = .0875(1000)/2 = $43.75 M = $1000 k d = 0.08/2 = 0.04; n = 12 X 2 = 24 24 P o = Σ 43.75/(1 + 0.04) t + 1000/(1 + 0.04) 24 t=1 = 43.75(PVIFA 0.04,24 ) + 1000(PVIF 0.04,24 ) = 43.75(15.247) + 1000(0.390) = $1057 (tables and calculator) Chapter 7-P 7 Consider the Leverage Unlimited, Inc., zero coupon bonds of 2008. Th e bonds were issued in 1990 for $100. Determine the yield to maturity (to the nearest 1/10 of 1 percent) if the a. Issue price in 1990. (Note: To avoid a fractional year holding period, assume that the issue and maturity dates are at the midpoint—July 1—of the respective years.) b. Market price as of July 1, 2004, of $750. c. Explain why the returns calculated in Parts a and b are different. a. P o = M/(1 + k d ) n = M(PVIF k d ,n ) n = 18 (2008 - 1990); P o = $100; M = $1000 $100 = $1000(PVIF k d ,18 ) (PVIF k d ,18 ) = 0.100 From Table II, this present value interest factor in the 18-year row is between the values for 13% (0.111) and 14% (0.095). Calculator solution is k d = 13.65 %.
Background image of page 2
b. P
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/22/2011 for the course ACCOUNTING 201 taught by Professor Stevejoseph during the Winter '11 term at Aarhus Universitet.

Page1 / 9

week 3 intermediate finance(ANSWER KEY) - Solutions Guide:...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online