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Comprehensive_Problem-_Chapter_7_7thEd._

# Comprehensive_Problem-_Chapter_7_7thEd._ - Chapter 7 Mini...

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Chapter 7- Mini Case THE MONETARY VALUE OF ANYTHING IS THE PRESENT VALUE OF THE FUTURE CASH FLOWS. What future cash flows does a bond have? Interest payments (Unless \$0 coupon rate) Payment of the par value Any others? 5 Variables: Present Value (PV) Future Value (FV) Periods (N) Interest Rate (I) Payments (Pmt.) a. Value (to you) Means you solve for PV. . reflects: your cost of capital your perception of risk i.e. YOUR discount rate All are \$1,000 par value bonds Means FV = \$1,000.00 Payments = Actual amount is fixed. Equals coupon interest rate times par value.

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Information given Are 5 variables Need to be given 4 Coupon Rate Par Value Microsoft 5.250% \$1,000.00 Ford 7.125% \$1,000.00 Xerox 8.000% \$1,000.00 Note the number of decimal points. Periods (years here) = Microsoft 30 Ford 25 Xerox 16 Interest = Depends on riskiness of individual bond.- given in These are the INVESTOR's required rate of retu Microsoft 6.00% Ford 15.00% Xerox 10.00% FV = Amount that will be paid at maturity, I.e. the par value. (all \$1,000 here) For each bond you are given 4 variables. FV (Future value) = par value I = individual required rate of return for each bond gi N = Individual time to maturity for each bond given Pmt. = Par value x coupon rate for each bond. Microsoft FV = \$1,000.00
Pmt. = \$52.50 N = 30 I = 6.00% PV = ? Ford FV = \$1,000.00 Pmt. = \$71.25 N = 25 I = 15.00% PV = ? Xerox FV = \$1,000.00 Pmt. = \$80.00 N = 16 I = 10.00% PV = ?

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