The day before the Federal Reserve Bank increased the Fed Funds rate by 0.25 %, menswear company Hayden Threadsraised $100 million by issuing bonds with par value of $100million, an annually paid coupon of 7.5%, and 20 years tomaturity. Use this information to answer the following two questions. Use the Fed's rate increase to calculate the elasicityof this bond issue. Answer is -.7503. I need to through steps

Step 1: Calculate the initial price of the bond: \[ PV_{initial} = \frac{7.5}{0.075} \times \left(1…

Answered: The day before the Federal Reserve Bank…

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 16P

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) Eight years ago, exactly, the Crimson Company issued a $50 million, 10-year, $1,000 par value, callable bond, with a 7% annual coupon rate, and a 5% call premium over par. With 2 years to go before the bond matures, Crimson is considering calling the bond because interest rates have suddenly decreased. If it decides to call the bond, and since it still needs the funding for the remaining 2 years, it will replace the bond with a 2-year bank loan of an equivalent amount ($50 million), with an annual interest rate of 4%. Interest would be paid at the end of each year, and the principal repaid at maturity. Calculate whether Crimson management would save by calling the bond and replacing it with the bank loan. Should it call its loan?
Rollincoast Incorporated issued BBB bonds two years ago that provided a yield to maturity of 11.5 percent. Long-term risk-free government bonds were yielding 8.7 percent at that time. The current risk premium on BBB bonds versus government bonds is half what it was two years ago. If the risk-free long-term governments are currently yielding 7.8 percent, then at what rate should Rollincoast expect to issue new bonds?
Four and a half years ago, the city of Baltimore sold at par a $1,000 bond with a coupon rate of 9 percent and 18 years to maturity. If this bond pays interest semiannually, what is the value of this bond to an investor who requires an 10 percent rate of return.
Williams Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 6.5%, payable annually, and a par value of $1,000. The 1-year interest rate is 6.5%. Next year, there is a 35% probability that interest rates will increase to 8% and a 65% probability that they will fall to 5%. If the company decides instead to make the bonds callable in one year, what coupon will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates fall and that the call premium is equal to the annual coupon.
Five years ago, Sportify Inc. issued a 20-year bond with an annual coupon rate of 12% to finance its $60 million oversea expansion (assume coupons are paid annually in this question). Because of the decreasing interest rates, it is considering the possibility of replacing it by a new 7% bond. To call the old bond, Sportify must pay the par value plus 3 annual coupons. The total flotation costs on the new issues are expected to be $1 million. The new bond will have to be issued one month before the old bondis called. During the overlap period, the proceeds from the new bond will earn 0.4% per month. The company’s tax rate is 20%. Calculate the NPV of the proposed refunding
Five years ago, Sportify Inc. issued a 20-year bond with an annual coupon rate of 12% to finance its $60 million oversea expansion (assume coupons are paid annually in this question). Because of the decreasing interest rates, it is considering the possibility of replacing it by a new 7% bond. To call the old bond, Sportify must pay the par value plus 3 annual coupons. The total flotation costs on the new issues are expected to be $1 million. The new bond will have to be issued one month before the old bond is called. During the overlap period, the proceeds from the new bond will earn 0.4% per month. The company’s tax rate is 20%. Calculate the NPV of the proposed refunding. dont use excel and show proper working
A government bond with a face value of $1,000 was issued eight years ago and there are twelve years remaining until maturity. The bond pays annual coupon payments of $90, the coupon rate is 9% pa and rates in the marketplace are 8% p.a. What is the value of the bond today? a. $1,000.00 b. $1,075.36 c. $1,762.35 d. $1,057.47 e. $1,105.29
Corral Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 8.5 percent, payable annually. The one-year interest rate is 8.5 percent. Next year, there is a 40 percent probability that interest rates will increase to 10 percent, and there is a 60 percent probability that they will fall to 6 percent. If the company decides instead to make the bonds callable in one year, what coupon will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates fall and that the call premium is equal to the annual coupon. a) 8.12% b) 8.77% c) 8.59% d) 8.35%
A mutual fund plans to purchase $500,000 of 30-year Treasury bonds in four months. These bonds have a duration of 12 years and are priced at 96-08 (32nds). The mutual fund is concerned about interest rates changing over the next four months and is considering a hedge with T-bond futures contracts that mature in six months. The T-bond futures contracts are selling for 98-24 (32nds) and have a duration of 8.5 years. If interest rate changes in the spot market exactly match those in the futures market, what type of futures position should the mutual fund create? How many contracts should be used? If the implied rate on the deliverable bond in the futures market moves 12 percent more than the change in the discounted spot rate, how many futures contracts should be used to hedge the portfolio? What causes futures contracts to have a different price sensitivity than the assets in the spot markets?
To help finance a major expansion, a company sold a noncallable bond several years ago that now has 15 years to maturity. This bond has a 5% annual coupon, paid semiannually, it sells at a price of $985, and it has a par value of $1,000. If the company’s tax rate is 28%, what component cost of debt should be used in the WACC calculation?

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