Review Problems 3 Solution

1. To begin, assume that it is now January 1, 1993, and that each bond in Table 1 matures on December 31 of the year listed. Further, assumes that each bond has $1,000 par value, each had a 30-year maturity when it was issued, and the bonds currently have a 10 percent required nominal rate or return.

GE has a face value of $98.40 and the coupon is 0.042%, which is equivalent to $0.00042, which is no money, rounded to the nearest hundredths. The maturity of the bond is 5 years (5/17/2021), so Billy would get $500.00 back from the GE bond issuers. Billy would make a dividend of $8 by buying the bond at a lower price than the returned money. PEP has a face value of $99.60 and the coupon percentage is 0.467%, which is 0.00467 and 0.01 rounded to the nearest hundredths. The maturity is 2 years (04/30/2018), so Billy would get $200.02 back and make a dividend of

You can earn 5% per year compounded annually for the next 4 years, followed by 8% per year compounded quarterly for 5 years. What is the average annual compounded rate of return over the 9 year period?

* 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.)

The yield to maturity on a 15-year bond is a true estimate of the cost of 30-year bond

1. Consider the $50,000 excess cash. Assume that Gary invests the funds in one-year CD.

∆P/P = –D*(∆y) D* = D/(1 + y) = 7/1.073 = 6.52 ∆P/P = –D*(∆y) = –6.52(–0.09%) = .59% New price = $1,073(1.0059) = $1,079.33 Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.

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?

2. An 8 percent semiannual coupon bond is priced at $1,204.60. The bond has a

- 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 following is the list of MAD statistics for each of the models you have estimated from time-series data:

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.

1. Bridget Company uses activity-based costing. The company has two products: A and B. The annual

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

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).