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rw7app7b_sol

# rw7app7b_sol - APPENDIX 7B B.1 NPV =[\$1,000.095.065.065...

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328 APPENDIX 7B B.1 NPV = [\$1,000(.095 .065)/.065] \$175 = \$286.54 B.2 NPV = 0 = [\$1,000(.095 – r)/r] \$175; r = 95/1,175 = 8.09% B.3 P = \$1,000 = [\$C + {0.5(\$C/.085) + 0.5(\$1,074)}]/1.075; C = \$78.17, or 7.817% B.4 P = \$1,000 = [\$70 + {0.5(\$70/.085) + 0.5(\$1,000 + x)}]/1.075; x = Call premium = \$186.47 B.5 P = [\$80 + {0.5(\$80/.085) + 0.5(\$1,120)}]/1.075 = \$1,033.11 B.6 P = [\$80 + {0.5(\$80/.085) + 0.5(\$80/.065)}]/1.075 = \$1,084.63 if no call provision present. Cost of the call provision = \$1,084.63 – \$1,033.11 = \$51.52 B.7 a. Under the assumption that the bond is callable at the stated premium of \$68 in two years we need to solve for the value of C such that: P = \$1,000 = [\$C + {0.25(\$C × PVIFA(7.75%, 18) + 1,000 × PVIF (7.75%, 18)) + 0.75(\$1,068)}]/(1.065) 2 ; C = \$79.19, or 7.92% b. Solve for the value of C such that: P = \$1,000 = [\$C + {0.2(\$C × PVIFA(7.75%, 18) + 1,000 × PVIF (7.75%, 18)) + 0.4(\$C × PVIFA(7.00%, 18) + 1,000 × PVIF (7.00%, 18)) + 0.4(\$1,068)}]/(1.065)
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