FIN 300 Lecture Notes - Lecture 8: Activist Shareholder, Discount Window, Double Taxation

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azurelouse708

9 Nov 2016

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Bond price = pv(coupons) + pv(face value) The coupon rate is not the interest rate. As time goes by, interest rate may change in the market, but coupon rate does not change. There is an inverse relationship between bond price and interest rate. The bonds of microhard, inc. carry a 10% annual coupon, have a ,000 face value, and mature in four years. Bonds of equivalent risk yield 15% (per year compounded annually). If this plan is implemented, the market price of the bond will (rise/fall) to ___________. (continue to assume a 15% required return. ) Annual coupon = 10% coupon pmt = 0. 10 x ,000 = . N = 4, i/y = 15, pv = 0, pmt = 100, fv= 1000, solve for pv. Deal: next 3 coupon payments @ half = . N = 4, i/y = 15, pv = 0, pmt = 50, fv = 1201, solve for pv.

Related Questions

You want to make a 5-year investment on bonds, and if you buy bonds with longer period of maturity, they will be sold at the prevailing market price at the end of the fifth year. All coupons will be reinvested. You forecast that the rates are going to change after you purchase the bonds. Now you have three bonds with same initial YTM to consider: A. 5-year maturity, 6% coupon paid annually, YTM=9% B. 10-year maturity, 8% coupon paid annually, YTM=9% C. 15-year maturity, 4% coupon paid annually, YTM=9% To pick the best one, you want to calculate the following:

1) What are the current prices of three bonds based on the initial YTM given? [2 points]Current prices of all bonds are shown below Bond 1: n=5; PMT = 6; YTM = 9%; FV = 100; PV=calculate = 88.33 It can be calculated by putting the values in the financial calculator OR by using the PV formule in excel which is =PV(9%,5,6,100) Bond 2 n=10; PMT = 8; YTM = 9%; FV = 100; PV=calculate = 93.58 Bond 3 n=15; PMT = 4; YTM = 9%; FV = 100; PV=calculate = 59.7

2) If the coupon payments are reinvested at the prevailing market rate (7% for the coming 5 years), what are the future values (at the end of the fifth year) of all five coupon payments for three bonds respectively? [3 points]

3) What are the selling prices of three bonds at the end of the fifth year, given that the prevailing market rate is 8% at that time? (For bond A, use its par value as the final selling price, as it will mature in 5 years). [2 points]

4) What are the HPRs for the three bonds? [2 points] 5) Whatâs your recommendation? [1 point]

yellowcaribou187

AB bonds carry a 10% annual coupon, have a $1,000 face value and mature in 4 years. Bonds of equivalent risk yield 15%. Find the market value of AB bonds.

AB is in financial difficulty and has asked its bondholders to accept the following deal. The firm would like to make the next two payments of half the scheduled amount, and make the last two payments of twice the scheduled amount. If this plan is implemented, what will be the new price of the bond?

(DO NOT USE EXCEL) Ford is about to issue a new corporate bond, face value= $1,000, coupon rate= 8% (annual), term to the maturity= 4 years. You know that a very similar bond issued by GM is already being traded in a bond market with its market price of $1,020, face value= $1,000, coupon rate= 6% (annual) and term to the maturity= 4 years. What would be the appropriate value of Ford's new corporate bond? (Assume that coupons are paid annual for Ford and GM bonds) (DO NOT USE EXCEL)

tanhornet221

FIN 300 Lecture Notes - Lecture 8: Activist Shareholder, Discount Window, Double Taxation

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