1.Seven years ago your firm issued $1,000 par value bonds paying a 7% semi-annual coupon with 15 years to maturity. The bonds were originally issued at par value.

a.What was the original yield to maturity on the bonds?
They were issued at par…so the YTM = Coupon rate: 7%

b.If the current price of the bonds is $875, what is the yield to maturity of the bonds TODAY? 1000FV
.07(1000)÷2=PMT
(15-7)*2 =N
-875PVI/Y = 4.623*2 = 9.25%

c.If the yield to maturity computed in part b remains constant, what will be the price of the bonds three years from today? Leave everything the same, just change N to (8 – 3)*2 = 10 PV = $911.70

2.You are looking to invest some money and identify two $1,000 par bonds with the same risk, both with 12 years to maturity and paying semi-annual coupons. Each of the bonds has a required return of 7%, but one bond is priced at $839.42 and the other at $1,120.44.

Compute the annual coupon rates for each bond.
1000FVOnly difference is price for second one
12*2N-1120.44PV
3.5I/Y
-839.42PVPMT = 42.5*2 = 85

3.A $1,000 par bond has a 5% semi-annual coupon and 12 years to maturity. Bonds of similar risk are currently yielding 6.5%.

a.What should be the current price of the bond?
1000FV
.05(1000)÷2=PMT
12*2 =N
6.5/2 = I/YPV = $876.34
b.If the bond’s price five years from now is $1,105, what would be the yield to maturity for the bond at that time? Just change N again, to…(12-5)*2 = N
-1105PVI/Y = 1.634*2 = 3.31%
c.What will the price of this bond be 1 year prior to maturity if its yield to maturity is the same as that computed in part b? Just change N = 1*2….PV = $1,016.52

...Stiles Corporation issues a new series of bonds on January 1, 1982. The bonds were sold at part ($1000), had a 12% coupon, and matured in 30 years, on December 31, 2011. Coupon payments are made semiannually (on June 30 and December 31).
a) What was the YTM on January 1, 1982? - Explain
b) What was the price of the bonds on January 1, 1987, 5 years later, assuming that interest rates had fallen to 10%? (Show in equation form, plug all the relevant numbers and without calculation, say whether the price would be above or below the par value)
c) Assume price you calculated is $1150. Find the current yield, capital gains yield, and total return on January 1, 1987. Explain what each of the calculated terms indicate.
d) On July 1, 2005, 6.5 years before maturity, Pennington’s bonds sold for &916.42. What was the YTM, the current yield, capital gains yield, and total return at that time? (No need to calculate them, but show in equation form, and conclude whether they increased, decreased or stayed the same and why)
e) Now assume that you plan to purchase an outstanding Pennington bond on March 1, 2005, when the going rate of interest given its risk was 15.5%. How large a check must you write to complete the transaction?
2. A bond’s expected return is sometimes estimated by its YTM and sometimes by its YTC. Under what conditions would the YTM provide a better estimate and when would the YTC be better?...

...Final Exam PracticeProblems
1. Firm ABC’s only outstanding debt is $100,000 worth of coupon bond (market value). Its yield to maturity is 8%. Given that its tax rate is 40%, what is its effective cost of debt?
Effective cost of debt = cost of debt * (1-tax rate) =8%*(1-40%)=4.8%
2. Firm ABC has a stock currently traded at $20. The next year’s dividend will be $0.20. The dividend growth rate is forecasted to be 6% forever. Risk-free rate is 3%, and market risk premium is 4%. Assume that Constant Dividend Growth Model and CAPM give you the same estimate of the cost of capital for equity, what is the beta of its stock?
By the Constant Dividend Growth Model:
Cost of Equity = D/P+g = 0.2/20+6%=7%
By CAPM, cost of equity = R(f)+ beta * market risk premium = 3% + beta* 4%,
Set this to be equal to 7%, solve for beta: beta=1
3. Firm ABC has a cost of equity of 8%, a cost of debt of 5%. It stock is traded at $10/share, and has 10 million shares outstanding. Its debt value is $20 million. Tax rate is 40%. What is its after-tax WACC?
Equity Value = 10*10=$100 million, Debt Value=$20 million
So, equity weight = 100/120=83.3%, debt weight=20/120=16.7%
After-tax WACC= equity weight * cost of equity + debt weight * effective cost of debt
=83.3%*8%+16.7%*5%*(1-40%) = 7.2%
4. Suppose you are the founder of a private company ABC. Initially you raised $500,000 from an angel investor from the first-round...

...BONDPROBLEM SOLUTIONS
1. Six years ago, The Corzine Company sold a 20-year bond issue with a 14 percent annual coupon rate and a 9 percent call premium. Today, Corzine called the bonds. The bonds originally were sold at their face value of $1,000. Compute the realized rate of return for investors who purchased the bonds when they were issued and who surrender them today in exchange for the call price.
PV = 1000; N = 6; PMT = 140; FV = 1090; CPT I/Y
I/Y = 15.02%
2. You just purchased a bond which matures in 5 years. The bond has a face value of $1,000, and has an 8 percent annual coupon. The bond has a current yield of 8.21 percent. What is the bond’s yield to maturity?
CURRENT YIELD = ANNUAL COUPON ( PV
0.0821 = 80 ( PV
PV = 80 ( 0.0821 = 974.42
N = 5; PMT = 80; FV=1000; PV = 974.42 CPT I/Y
I/Y = 8.65%
3. The Dass Company’s bonds have 4 years remaining to maturity. Interest is paid annually; the bonds have a $1,000 par value; and the coupon interest rate is 9 percent. What is the yield to maturity at a current market price of $829? Would you pay $829 for one of these bonds if you thought that the appropriate rate of return was 12 percent?
PV = 829; N = 4; FV = 1000; PMT =90; CPT I/Y
I/Y = 14.99%
YES, IF YOU THOUGHT THE APPROPRIATE RATE WAS 12%,...

...perpetual bond is currently selling for RS. 95/-. The coupon rate of interest is 13.5%. The approximate discount rate is 15%. The value of the bond and the YTM is:
(a) Rs. 90/- and 14.2% Value is (13.5*15%=90) and YTM is ((13.5/95)*100=14.21%)
(b) Rs. 100/- and 13.5%
(c) Rs. 90 and 15%
(d) Rs. 90/- and 13.5%
902. In 2001, Meridian Ltd. has issued bonds of Rs. 10,000/-each due in 2011 with a 14% per annum coupon rate payable at the end of each year during the life of the bond. If the required rate of interest is 8%, find the present value of the bond. Tick the nearest option.
(a) 10,000
(b) 7302
(c) 2,700
(d) 14,026 (9394.11+4631.93=14026.05)
903. The present market value of an equity share is Rs. 80/-; and the exercisable price of the warrant is Rs. 60/- per share. An investor is holding a warrant entitling him to purchase 50 equity shares. The minimum value of the warrant is:
(a) 1,000/- (80-60=20*50=1000)
(b) 4,000/-
(c) 3,000/-
(d) None of these
904. A bond with a coupon rate of 8% is available at its face value of Rs. 1,000/-. The market rate of return on an instrument with similar risk goes down to 6%. The bond price will become:
(a) 1,000/-
(b) 750/-
(c) 1,333/- (800/6%)
(d) None of these
905. A bond with a coupon rate of 10% is available at Rs. 1,250/-. The face value of the bond is Rs. 1,000/-. The...

...INTRODUCTION
- The Swan Davis Corporation case focuses on following issues:
The importance in bond and stock valuation;
The capital structure of the company; and
How they effects to the capital budgeting decisions of the company.
- Swan- Davis Inc., (SDI) manufactures equipment for sale to large contractors, the company was found in 1976 and it went to the public in 1980 at its shares value risen from $1 to $15 since it enter to the market.
- The financial statements for the past three years show a decline trend in both the operation and return on shareholder of the company, so a closer look at the factors contributing to this decline is needed.
- The capital structure of company mainly constitutes of:
1. Deb
a. Bond A which is activities trade and highly liquid, issued 10 years ago, and it has 10 years to maturity.
b. Bond B which is thinly traded and no valid market quotation is available; it has 23 years to maturity more.
2. Preferred stock
3. Equity Stock and retained earning.
Question 1:
If an investor bought some of SDI's A bonds at the current market price, what would be his/her yield to maturity?
Look at the case concerns, bond A has a $1000 par value and coupon rate is 10%, pail semiannually. The bond was issued 10 years ago, and has 10 years to maturity; current market price is $1092.
Input data Calculation result is compounded semiannually
Par value...

...Bonds and Their Valuation
After reading this chapter, students should be able to:
• List the four main classifications of bonds and differentiate among them.
• Identify the key characteristics common to all bonds.
• Calculate the value of a bond with annual or semiannual interest payments.
• Explain why the market value of an outstanding fixed-rate bond will fall when interest rates rise on new bonds of equal risk, or vice versa.
• Calculate the current yield, the yield to maturity, and/or the yield to call on a bond.
• Differentiate between interest rate risk, reinvestment rate risk, and default risk.
• List major types of corporate bonds and distinguish among them.
• Explain the importance of bond ratings and list some of the criteria used to rate bonds.
• Differentiate among the following terms: Insolvent, liquidation, and reorganization.
• Read and understand the information provided on the bond market page of your newspaper
Characteristics of Bonds
A bond is a long-term contract under which a borrower (the issuer) agrees to make payments of interest and principal, on specific dates, to the holders (creditors) of the bond.
Bearer bond - Bonds that are not...

...and Answers
Using present value to value bonds
A bond, from the perspective of the person issuing the bond is a form of long term debt.
In the hands of the person who has acquired the bond it is an asset.
The agency issuing the bond agrees to pay a fixed sum of money to the holder of the bond for a period of years and then, at the end of that period, to pay back the face value of thebond.
Bonds can be issued by a variety of agencies/companies:
1. Municipal bonds: issued by cities, states and other local agencies
2. Government bonds: issued by the department of finance/treasury department of a government
3. Corporate bonds: issued by companies
Our main interest in relation to bonds is in corporate bonds. Why do companies issue bonds?
• Raise finance
• Often cheaper than bank borrowings
Terminology relevant to bond valuation
• Nominal/Face value/Principal – This is the amount on which interest payments are based. It is normally a round sum such as €1,000.
• Redemption value – This is the amount that will be paid out by the issuer of the bond when he comes to repay/redeem it.
• Coupon – The amount of interest paid on the bond is referred to as the coupon and the rate (%) is the coupon...

...Introduction of bonds……………………………………………..01
Characteristics of Bonds…………………………………………01
Types of Bonds…………………………………………………… 06
Bonds Market……………………………………………………… 08
Introduction of Pakistan bond market……………...................08
How Bonds Trade……………………………………………….….09
Bond Price Variations……………………………………………..09
Bond valuation…………………………………………..................09
Types ofbonds trade in Pakistan……………………………….10
Government Debt Securities……………………………………..10
Characteristics of MTBs and PIBs………………………………12
Pakistan Investment Bonds……………………………………... 12
Auction Mechanism………………………………………………...13
Corporate Bond Market…………………………………………....13
Conclusion…………………………………………………………...14 Reference………………………………… ……………….………...14
Summary of Articles………………………………………………..15
Introduction of bonds
Definition:
A bond is basically a loan. The owner of a bond has given the issuer-whether it is a corporation, a government or another agency-a sum of money that can be used at any point. In exchange, the issuer will pay interest to the bondholder over a period of time and will eventually return the initial amount loaned, called the principal. Unlike a stock, the bondholder does not own a part of the company. Because a bond is basically a loan, they are often called "debt securities"...

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