FIN 301 Fall 2010 HW2

# FIN 301 Fall 2010 HW2 - FIN 301 Fall 2010 Homework 2...

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FIN 301 Fall 2010 Homework Assignments Homework 2 (Due by 4:00 PM on October 15) A. Problem 1 Four years ago, Beer Necessities Inc. (BN) issued a bond with a \$1,000 face value, semi-annual coupons, 8% coupon rate, and 20-year maturity. The bond originally (four years ago) sold at par. Today, the yield-to-maturity is 9%. (a) How much do BN bonds sell for today? (b) An investor purchased a BN bond six months ago when the yield-to-maturity was 7% and sells it today. Calculate the six-month i) return and ii) capital gain/loss (both in percentage terms) earned by the investor. (Remember that the % capital gain – or loss – is a constituent of total return resulting from a change in the price of an investment.) (c) Suppose that one year from now the price of BN bonds is \$1,196. What is the corresponding yield-to-maturity (i.e. the YTM one year from today)? B. Problem 2 Finnish Furniture Inc has just sold \$20,000,000 worth of bonds to investors. The bonds were sold at par, carry an annual coupon of 10% and will mature in five years. Five years ago Danish Desks & Dressers Etc Inc sold \$15,000,000 worth of bonds with ten years until maturity, also at par. These bonds carry a coupon rate of 12% with coupons paid semi-annually. Neither the Finnish Furniture nor the Danish Desks bonds have any complex features (they are not callable, they are not convertible etc.), their terms (covenants etc.) are the same and they received the same rating from the major bond rating agencies. What is the current yield-to-maturity on Danish Desks bonds? C. Problem 3 You must invest \$100,000 and the bonds listed below from A to E are the only investments available today (assume that it is possible to buy a fraction of a bond in order to invest the full \$100,000 – for example it is possible to buy 134.39 of bond D). The same 6% market interest rate (APR, compounded semi-annually) applies

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FIN 301 Fall 2010 HW2 - FIN 301 Fall 2010 Homework 2...

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