Chapter 7

b. What would be the value of each bond if they had annual coupon payments?

A bond with an annual coupon of $70 and originally sold at par for $1,000. The current market interest rate (yield to maturity) is 8%. This bond will sell at _______. Assuming no change in market interest rates, the bond will present the holder with capital ________ as it matures.

24. What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4% for an investor in the 28% tax bracket?

Give an example. (5 marks) Briefly discuss whether the short-term differences between applications in (a) are removed when the investment is sold. (3 marks) Briefly suggest reasons why short-term differences may not be irrelevant. (2 marks)

(b) Coupon and principal of the Regular Treasury bonds are fixed, therefore if the inflation rate increases in the forecasting future, investor will receive the same amount of coupon and principal with less real value and purchasing power.

a) Assuming the opportunity interest rate is 6%, what is the present value of the second alternative?

a. What is the CD’s value at maturity (future value) if it pays 10 percent annual interest?

1.00 point A bond with a 7-year duration is worth $1,073, and its yield to maturity is 7.3%. If the yield to maturity falls to 7.21%, you would predict that the new value of the bond will be approximately _________.

a. What would Mrs. Beach have to deposit if she were to use high quality corporate bonds an earned an average rate of return of 7%.

- The Bet-r-Bilt Company has a 5-year bond outstanding with a 4.30 percent coupon. Interest payments are paid semi-annually. The face amount of the bond is $1,000. This bond is currently selling for 93 percent of its face value. What is the company's pre-tax cost of debt?

The bonds have 20 years to maturity, pay interest at 9.3%, have a par value of $1,000 and are currently selling for $890.

So, the 20 year corporate bond interest rate associated with the company’s rating is 3.86.

b. Generate a graph or table showing how the bond’s present value changes for semi-annually compounded interest rates between 1% and 15%.

Since the interest payments are tax deductible, the aftertax cash flow from the interest payments will be:

Through this method, we obtained theoretical yields of the 4.25% coupon bond and 10.625% coupon bond to be 2.899% and 2.639% respectively. The corresponding theoretical prices of the bonds are $108.27 for the 4.25% coupon bond and $149.31 for the 10.625% coupon bond (see Table 1 above).