Fin515 Homework Week 3

Assignment 3

Problems (pp.210-211)

Question (p.257)

Problems (pp. 258-259)

Rodie O. Abejero

rodie.abejero@me.com

310-756-7633

FIN515- Managerial Finance

Prof. Paul Tovbin

March 21, 2013

(5-1) Bond Valuation with Annual Payments

Jackson Corporation’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 8%. The bonds have a yield to maturity of 9%. What is the current market price of these bonds?

VB = INT*r*[1 -(1+rd)-n]/i + M*(1+rd)-n

INT = par value

M= maturity value

r = coupon rate per coupon payment period

rd= effective interest rate per coupon payment period

n = number of coupon payments remaining

INT = 1000. And, since we are not given the maturity value, we can assume that it is the same as the par value. Therefore, M = 1000.

r = .08

i = .09

n = 12

Market price of the bonds=1000*.08 * (1 - 1.09-12)/.09 + 1000*1.09-12

Market price of the bonds = $928.39

(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?

N = 12

I = ?

PV = -$850

PMT = 1000 X 0.10 = 100

FV = $1000

Using Excel’s RATE function: RATE(nper,pmt,pv, fv, type)

RATE (12,100,-850,1000,0) = 12.475%

(5-6) Maturity Risk Premium

The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.3%. What is the maturity risk premium for the 2-year security?

r = r* + IP + MRP

6.3 = 3 + 3 + MRP

6.4 = 6 + MRP

MRP = 6.3 – 6

MRP = 0.3

(5-7) Bond Valuation with Semiannual Payments

Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the bonds?

N =...