Fixed Income Securities

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

* b.Assume the firm’s stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm’s straight bonds yield 12%. Assume that each warrant will have a market value of $3 when the stock sells at $20. What coupon interest rate, and dollar coupon, must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.)

13. What is the formula for the Present Value (PV) for a finite stream of cash flows (1 per year) that lasts for 10 years?

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

10. An investment of $1,000 today will grow to $1,100 in one year. What is the continuously compounded rate of return?

c) The present value of $500 to be received in one year when the opportunity cost rate is 8 percent (discounting):

Its coupon rate is 8.3%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 5.3%. The modified duration of this bond is ______ years.

9. You want to purchase a business with the following cash flows. How much would you pay for this business today assuming you needed a 14% return to make this deal?

- 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?

Online Quiz Questions for Week 3  Topic: Term Structure  Question: Assume that coupon interest is paid annually and all bonds have a face value of $100. Given the yields to  maturity of the i) 1‐year 13% coupon bond, ii) 2‐year 11.5% coupon bond and iii) 3‐year 9% coupon bond are 10%,  9.5% and 9% respectively. Compute f(1,2), the interest rate of a 1‐year bond in 2 years’ time.    Correct Answer:     7.88%    Question:   Suppose that all investors expect that interest rates on a 1‐year bond for the next 4 years will be as follows:  Today interest rate for a 1‐year bond = 5%  Forward rate for a 1‐year bond in 1 year = 7%     Forward rate for a 1‐year bond in 2 years = 9%     Forward rate for a 1‐year bond in 3

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.

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

And, if the Treasury rate is 9.10 percent, the make whole call price in 7 years is:

2. The discount rate for this bond would be 0.70%. I started with an appropriate discount rate to derive my bond purchase price, since I would not purchase a bond without finding out ahead of time what a good price should 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).