rw7app7b_sol - APPENDIX 7B B.1 NPV = [$1,000(.095...

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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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This note was uploaded on 11/10/2011 for the course ADMS ADMS 4540 taught by Professor Lie during the Spring '11 term at York University.

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