W3CompProblems - Week 3 - Bond and Stock Valuation CHAPTER...

Week 3 - Bond and Stock Valuation
CHAPTER 6
INTEREST RATES AND BOND
VALUATION
19. The company should set the coupon rate on its new bonds equal to the required return of the existing
bond. The required return can be observed in the market by finding the YTM on outstanding bonds
of the company. So, the YTM on the bonds currently sold in the market is:
P = $1,125 = $42.50(PVIFA
R% ,40
) + $1,000(PVIF
R% ,40
)
Using a spreadsheet, financial calculator, or trial and error, we find:
R = 3.651%
This is the semiannual interest rate, so the YTM is:
YTM = 2 × 3.651%
YTM = 7.30%
22. The bond has 12 years to maturity, so the bond price equation is:
P = $915.35 = $48.75(PVIFA
R% ,24
) + $1,000(PVIF
R% ,24
)
Using a spreadsheet, financial calculator, or trial and error, we find:
R = 5.520%
This is the semiannual interest rate, so the YTM is:
YTM = 2 × 5.520%
YTM = 11.04%
The current yield is the annual coupon payment divided by the bond price, so:
Current yield = $97.50 / $915.35
Current yield = 0.1065 or 10.65%
23.

Number of zero coupon bonds to sell = $45,000,000 / $229.34 = 196,217.04
b .