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# Selected Liabilities of the rm Simple loan 800 Fixed-payment Loans 5000 Long -term Bonds #1 500 000 Long -term Bonds #2 1 080 000 Liabilities Total 1...

Selected Liabilities of the ﬁrm Simple loan 800
Fixed-payment Loans 5000
Long -term Bonds #1 500 000
Long -term Bonds #2 1 080 000
Liabilities Total 1 585 800
Market Price for Bond #1 930.5
Market Price for Bond #2 859.5
Face value of Each Bond 1000
Selected Current Assets of the ﬁrm Marketable Securities: Treasury Bills 100 000 Note: Treasury bills have \$10000 face value, which matures in one year. Each Treasury bill has a cost of \$9580.00
Using the information in the table, answer the following questions. 5%
12%
10%
10%

8. If investors holding our 4—year bonds (Bond #1) receive interest income annually for four years, plus the face value of the bonds at maturity, a. What will be the total interest earned on the bond over the next four years?
b. What will be the face value received at maturity? Given the following projected income stream for Bond #1: Coupon Face Prueched Reinvestment Rates
Year Interest (3) Value (5) 10% 5%
1 100
2 100 10.00 5.00
3 100 21.00 10.25
4 100 m M 15.76
Total
'ncome
in year 4 499. 10m. mo. 1 5.76 What is the total cash available over the next four years to the bondholder earning 10%? What is the total cash available over the next four years to the bondholder earning 15%? What is the average annual rate of return for the bondholder earning 10%? (Hint: Use the market price of 930.50.)
What is the average annual rate of return for the bondholder earning 15%? (Hint: Use the market price of 930.50.)
Why does the reinvestment rate affect the annual rate of return for the same bond? If the expected rate of return on our bonds is 10%, what is the duration of Bond #1? F‘PrnEDP-f‘ 9. What is the yield to maturity on the Treasury Bills (a discount bond)? 10. What is the real rate of interest if the nominal rate is 10% and the inﬂation rate is 3%?

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