PFIN Online, 1 term (6 months) Printed Access Card for Billingsley/Gitman/Joehnk's PFIN 6
6th Edition
ISBN: 9781337118026
Author: Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher: Cengage Learning
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Question
Chapter 12, Problem 10FPE
a)
Summary Introduction
To determine: The clean price of the bond
b)
Summary Introduction
To determine: The dirty price of a bond
c)
Summary Introduction
To discuss: The way the clean and dirty price of a bond are relevant to the buyer.
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Lantech investor is deciding between two bonds: Bond A pay $72 annual interest and has a market value of $925. It has 10 years to maturity. Bond B pays $62 annual interest and has a market value of $910. It has two years to maturity. Par value of the bonds is $1,000.
A. What is the current yield on both bonds?
B. Which bond should be chosen and why?
C. A drawback of current yield is that is doesn't consider the total life of the bond. E.g. Yield to maturity on Bond A is 8.33 percent. What is the yield to maturity on Bond B?
D. Is your answer changed from parts B and C based on which bond should be chosen?
1)Your broker offers to sell for $1,157 a AAA-rated bond with a coupon rate of 7 percent and a maturity of six years. Given that the interest rate on comparable debt is 4 percent, calculate the bond's price. Assume that the bond pays interest annually. Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar.
2)Is your broker fairly pricing the bond?
3)the bond should or should not be purchased?
PICK ONE: Explain why
YOU: Suppose that 6 months after you purchase the bond, the market rate for interest on this type of bond falls to 7.00%. This will cause the (coupon / market price / par value) to (fall / rise). From the issuer’s perspective, the lower interest rate means that he or she would be (worse / better) off issuing new bonds at this lower rate than continuing to pay you 9%.
Chapter 12 Solutions
PFIN Online, 1 term (6 months) Printed Access Card for Billingsley/Gitman/Joehnk's PFIN 6
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