The Florida Investment Fund buys 58 bonds of the Gator Corporation through a broker.
The bonds pay 10 percent annual interest. The yield to maturity (market rate of interest) is
12 percent. The bonds have a 10-year maturity.
Using an assumption
The Landers Corporation needs to raise $1.60 million of debt on a 20-year issue. If it
places the bonds privately, the interest rate will be 10 percent. Twenty thousand dollars in
out-of-pocket costs will be incurred. For a public issue, the in
Five years ago, Kennedy Trucking Company was considering the purchase of 60 new diesel
trucks that were 15 percent more fuel-efficient than the ones the firm is now using. Mr.
Hoffman, the president, had found that the company uses an average o
Kings Department Store is contemplating the purchase of a new machine at a cost of
$22,802. The machine will provide $3,500 per year in cash flow for nine years. Kings has
a cost of capital of 10 percent. Using the internal rate of return metho
The Pan American Bottling Co. is considering the purchase of a new machine that would
increase the speed of bottling and save money. The net cost of this machine is $60,000.
The annual cash flows have the following projections.
Worst Buy Company has had a lot of complaints from customers of late and its stock price is
now only $2 per share. It is going to employ a one-for-five reverse stock split to increase the
stock value. Assume Dean Smith owns 140 shares.
a. How m
Given a 10-year bond that sold for $1,000 with a 13 percent coupon rate, what would be the price of the
bond if interest rates in the marketplace on similar bonds are now 10 percent? Interest is paid
semiannually. Assume a 10-year time period.
3. Given the facts in problem 2, what would be the price if interest rates go down to 8 percent? (Once
again, do a semiannual analysis.)
PV of $45 semiannually for n = 30 and i = 4%
(Table 12-1 or Appendix D)
$45 17.292 = $778.14
PV of $1,000
Explain the benefits derived from investing in deep discount bonds
Deep discount bonds have almost no change of being called away even if prices go up because
the value is already far removed from par. Secondly, deep discount bonds offer the opport
2. Given a 15-year bond that sold for $1,000 with a 9 percent coupon rate, what would be the price of
the bond if interest rates in the marketplace on similar bonds are now 12 percent? Interest is paid
semiannually. Assume a 15-year time period.
An investor places $800,000 in 30-year bonds (12 percent coupon rate), and interest rates decline by 3
percent. Use Table 124 to determine the current value of the portfolio.
$ 800, 000
$ 247, 680
$ 800, 000
$1, 047, 680
4. Using Table 123, determine the price of a
a. 10 percent coupon rate bond, with 20 years to maturity and a 14 percent yield to maturity.
b. 12 percent coupon rate bond with 10 years to maturity and an 8 percent yield to maturity.
a) 73.34% $1,000
What is the significance of the yield-to-call calculation?
12-6. If a bond is callable, the yield to call calculation shows what the yield for that time period would
be as compared to yield to maturity (which you may never get to) or some other len
What is the bond reinvestment assumption? Is this necessarily correct?
12-7. It is assumed that funds are reinvested at the yield from the investment. This is not necessarily
the case. Reinvestment may take place at a higher or lower rate (as will
Why is current yield not a good indicator of bond returns? (Relate your answer to maturity
The current yield does not consider the length of time to maturity. A dollar received this year is worth
more than dollars received in futur
What does an ascending term structure pattern tend to indicate?
12-9. When the term structure is in an ascending posture (short-term rates are lower than long-term
rates), it is a general signal that interest rates will rise in the future.
How might the market segmentation theory help to explain why short-term rates on government
securities increase when bank loan demand becomes high?
12-12. When bank loan demand becomes high, banks are likely to partially withdraw from investments
What is the current yield in problem 8? Why is it slightly higher than the yield to maturity?
$100/$1,090.90 = 9.17%
It is higher than yield to maturity because it does not take into consideration the fact that the
bond price will decline from $1,0
In doing a five-year analysis of future dividends, the Dawson Corporation is considering
the following two plans. The values represent dividends per share.
a. How much in total dividends per share will be paid under each plan over five year
Modern Furniture Company had finally arrived at the point where it had a sufficient
excess cash flow of $4.8 million to consider paying a dividend. It had 3 million shares of
stock outstanding and was considering paying a cash dividend of $1.60
A financial analyst is attempting to assess the future dividend policy of Environmental
Systems by examining its life cycle. She anticipates no payout of earnings in the form of
cash dividends during the development stage (I). During the growth
The Western Pipe Company has the following capital section in its balance sheet. Its stock
is currently selling for $6 per share.
Common stock (50,000 shares at $2 par) .
Capital in excess of par
Why might a stock dividend or a stock split be of limited value to an investor?
The asset base remains the same and the stockholders proportionate interest is unchanged
(everyone got the same new share). Earnings per share will go down
The Carlton Corporation has $5 million in earnings after taxes and 2 million shares
outstanding. The stock trades at a P/E of 20. The firm has $4 million in excess cash.
a. Compute the current price of the stock.
b. If the $4 million is used to
Wilson Pharmaceuticals stock has done very well in the market during the last three
years. It has risen from $55 to $80 per share. The firms current statement of stockholders
equity is as follows:
Common stock (5 million shares issued
at a par
Under what circumstances would the yield spread on different classes of debt obligations tend to be
12-13. The yield spread represents the difference in returns for different classes of bonds based on
ratings. The yield spread tends to be
Describe how yield to maturity is the same concept as the internal rate of return (or true yield) on an
Yield to maturity is the same concept as internal rate of return or true yield because it is the
interest rate (i) at which you can
What is the meaning of term structure of interest rates?
12-8. The term structure of interest rates depicts the relationship between maturity and interest rates.
It is sometimes called a yield curve because yields on existing securities, having mat