80*7.1607+1000*.3555 = $928 • 5-2 Yield to Maturity for Annual payments Wilson Wonders’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity? 100+1000-850/12/1000+850/2 = 112.5/925 = .1216 or 12.16% • 5-6 Maturity Risk Premium The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years.
8% b. 8% 2. a. A $1,000 bond has a 7.5 percent coupon and matures after 10 years. If current interest rates are 10 percent, what should be the price of the bond? Price = $1,000 x 0.3855 + $1,000 x 7.5% x 6.1446 Price = $385.50 + $460.85 Price = $846.35 b.
What would be the second year future value? (LG4-3) FV = 750 × (1 + 0.10) (1 + 0.12) 750 × 1.10 × 1.12 Answer: 924.00 4-11 Present Value What is the present value of a $1,500 payment made in six years when the discount rate is 8 percent? (LG4-4) PV = 1500/(1+0.08)6 1500/1.586874323 Answer: 945.25 4-13 Present Value with Different Discount Rates Compute the present value of $1,000 paid in three years using the following discount rates: 6 percent in the first year, 7 percent in the second year, and 8 percent in the third year. (LG4-4) PV = 1000 / ((1 + 0.06) (1 +0.07) (1 + 0.08)) 1000/ (1.06 × 1.07 × 1.08) 1000/1.224936 Answer: 816.37 4-16 Rule of 72 Approximately how many years are needed to double a $500 investment when interest rates are 10 percent per year? (LG4-6) N=72 / 10 Answer: 7.2 4-31 Solving for Time How many years (and months) will it take $2 million to grow to $5 million with an annual interest rate of 7 percent?
Text Problem Sets and Concept and Principles Summary FIN 571 Text Problem Sets and Concept and Principles Summary Problem A3: (Bond valuation) General Electric made a coupon payment yesterday on its 6.75% bonds that mature in 8.5 years. If the required return on these bonds is 8% APR, what should be the market price of these bonds? PMT -33.75 FV -1000 N 17 Rate 4% Market Price $923.96 Fair Value of a bond = C/r*(1-1/(1+r)^n)+M/(1+r)^n Assuming that it’s a semi-annual bond with face value of $1000 A13. (Required return for a preferred stock) Sony $4.50 preferred is selling for $65.50. The preferred dividend is non-growing.
If it is compounded continuosly? Explain the results. Annual: PV = -2000, I/YR = 6; N = 10; solve for FV = $3581.70 Quarterly: I/YR = 6/4 = 1.5; N = 10*4 = 40; solve for FV = $3628.04 Continuously: -2000*(e**.06**10) = $3,644.24 FV increases with the number of compounding periods Question 1b What will be the total accumulated amount at the end of 10 years if in addition to the initial $2,000, you also deposit $4,000 in year 4 and $8,000 in year 8? Assume an annual 6% interest rate for all ten years. First cash flow: FV = 3581.70 (already done) Second cash flow: PV = -4000, N = 6, I/YR = 6, solve for FV = 5674.08 Third cash flow: PV = -8000, N=2, I/YR = 6; solve for FV = 8988.80 ANSWER: 3581.70+5674.08+8988.80 = $18,244.58 Question 1c Using the information from Question 1b, what will be the total accumulated value at the end of 10 years, if the interest rate is expected to be 6% for only the first three years, followed by 8% for the next five years, and 10% thereafter?
WE PROVIDE CASE STUDY ANSWERS, ASSIGNMENT SOLUTIONS, PROJECT REPORTS AND THESIS aravind.banakar@gmail.com ARAVIND - 09901366442 – 09902787224 CORPORATE FINANCE CASE STUDY : 1 Reliance company has a $ 1,000 face value convertible bond issue that is currently selling in the market for $ 950. Each bond is exchangeable at any time for 25 shares of the company’s stock. The convertible bond has a 7 percent coupon. Payable semi-annually. Similar non-convertible bonds are priced to yield 10 percent.
Should the company purchase the small technology firm? Use an interest rate of 12%. What is the “breakeven price” of the small technology firm? (Points : 10)\ 2. A bond has a par value of $100,000 and pays interest revenues of $5,000 per year.
$80, 8% c. $60, 10% d. $80, 10% e. $100, 10% Answer: e V0 = D/k = 8/0.08 = $100. ROI = (80+8)/80 = 10% 5. I checked the Microsoft stock price at 9:12am this morning. It was $24.88. The last 12 month trailing (ttm) net earnings is $14.58 billion with 9 billion shares.
The note is due April 1, 2013. Shabbona would normally have to pay interest at a rate of 10% for such a borrowing, and the dealership has an incremental borrowing rate of 8%. ** Truck #3 has a list price of $16,000. It is acquired in exchange for a computer system that Shabbona carries in inventory. The computer system cost $12,000 and is normally sold by Shabbona for $15,200.
You want to hedge a medium-term Treasury portfolio that has a Macauley duration of 4.0 years. A T-bond futures contract has a notional value = $100,000. The yield to maturity on the CTD bond and on the portfolio are both 9.50 percent (9.50%). Your portfolio has a market value equal to $120 million and the decimal equivalent T-bond futures price is equal to 68.91. For simplicity’s sake assume the conversion factor of the CTD Bond = 1.0000 and the that the relative yield change = 1.00.