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**Unformatted text preview: **Chapter 10: Valuation and Rates of Return Chapter 10 Problems (For the first 20 bond problems, assume interest payments are on an annual basis.) 1. Bond value (LO3) The Lone Star Company has $1,000 par value bonds outstanding at 9 percent interest. The bonds will mature in 20 years. Compute the current price of the bonds if the present yield to maturity is: a. 6 percent. b. 8 percent. c. 12 percent. 10-1. Solution: Loan Star Company a. 6 percent yield to maturity Present Value of Interest Payments PV A = A × PV IFA (n = 20, i = 6%) Appendix D PV A = 90 × 11.470 = $1,032.30 Present Value of Principal Payment at Maturity PV = FV × PV IF (n = 20, i = 6%) Appendix B PV = 1,000 × .312 = $312 Total Present Value Present Value of Interest Payments $1,032.30 Present Value of Principal Payment 312.00 Total Present Value or Price of the Bond $1,344.30 10-1. (Continued) b. 8 percent yield to maturity PV A = A × PV IFA (n = 20, i = 8%) Appendix D PV A = $90 × 9.818 = $883.62 10-1 Chapter 10: Valuation and Rates of Return 2 Chapter 10: Valuation and Rates of Return PV = FV × PV IF (n = 20, i = 8%) Appendix B PV = $1,000 × .215 = $215 $ 883.62 215.00 $1,098.62 c. 12 percent yield to maturity PV A = A × PV IFA (n = 20, i = 12%) Appendix D PV A = $90 × 7.469 = $672.21 PV = FV × PV IF (n = 20, i = 12%) Appendix B PV = $1,000 × .104 = $104 $672.21 104.00 $776.21 2. Bond value (LO3) Applied Software has $1,000 par value bonds outstanding at 12 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is: a . 11 percent. b . 13 percent. c . 16 percent. 10-2. Solution: Applied Software a. 11 percent yield to maturity Present Value of Interest Payments PV A = A × PV IFA (n = 25, i = 11%) Appendix D PV A = $120 × 8.422 = $1,010.64 Present Value of Principal Payment at Maturity 10-3 Chapter 10: Valuation and Rates of Return PV = FV × PV IF (n = 25, i = 11%) Appendix B PV = $1,000 × .074 = $74 Total Present Value Present Value of Interest Payments $1,010.64 Present Value of Principal Payments 74.00 Total Present Value or Price of the Bond $1,084.64 b. 13 percent yield to maturity PV A = A × PV IFA (n = 25, i = 13%) Appendix D PV A = $120 × 7.330 = $879. 60 PV = FV × PV IF (n = 25, i = 13%) Appendix B PV = $1,000 × .047 = $47 $879.60 47.00 $926.60 10-2. (Continued) c. 16 percent yield to maturity PV A = A × PV IFA (n = 25, i = 16%) Appendix D PV A = $120 × 6.097 = $731.64 PV = FV × PV IF (n = 25, i = 16%) Appendix B PV = $1,000 × .024 = $24.00 $731.64 24.00 $755.64 4 Chapter 10: Valuation and Rates of Return 3. Bond value (LO3) Barry’s Steroids Company has $1,000 par value bonds outstanding at 12 percent interest. The bonds will mature in 50 years. Compute the current price of the bonds if the percent yield to maturity is: a . 4 percent....

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