Week 2 Text Problem Set
Candy Wungnema
FIN/571
February 5, 2013
Kathleen O’Keefe
Week 2 Text Problem Set
Chapter 5
4. Define the following terms: bond indenture, par value, principal, maturity, call provision, and sinking fund.

• Bond indenture: A contract for a bond defining specified terms for interest and borrowed capital to be repaid to the lender. • Par value: “Specifies the amount of money that must be repaid at the end of the bond’s life, which is also called face value or maturity value” (Emery, Finnerty, & Stowe, 2007, p. 112). • Principal: The original amount of debt or balance borrowed, which does not include interest. • Maturity: The life end of a contractual obligation.

• Call provision: The right for the issuer to payoff bonds prior to the maturity date (Emery, Finnerty, & Stowe, 2007). • Sinking funds: Bon repayment in multiple installments (Emery, Finnerty, & Stowe, 2007).

11. What is interest-rate risk? How is interest-rate risk related to the maturity of a bond and to the coupon rate for a bond?

“Interest-rate risk is the sensitivity of a bond’s value to interest-rate change as it depends primarily on the bond’s remaining maturity” (Emery, Finnerty, & Stowe, 2007, p. 132). An issued bond pays a fixed rate of interest called a coupon rate until it matures. The current prevailing interest rates and the perceived risk of the issuer are related to the rate. Upon a bond sale on the secondary market prior to the maturity date will affect the value of the bond and not the coupon as the rates are based on the market interest rates as the time of sale.

A6. (Yield to maturity) Marstel Industries has a 9.2% bond maturing in 15 years. What is the yield to maturity if the current market price of the bond is: a. $1,120? b. $1,000? c. $785? a. Current Price $1,120

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FIN 571 Week Two...

...FIN/571: Corporate Finance
TextProblemSets - Week Two
Chapter Five
Question # 4
Define the following terms: bond indenture, par value, principal, maturity, call provision, and sinking fund.
Bond indenture. Bond indenture is a legal contract for a publicly traded bond. The structure of this contract outline incentives explicitly by detailing responsibilities, constraints, penalties, and oversight required. For example, contracts...

...Chapter 8
Supplemental Homework/Practice Problems
Solutions may be found on the FIN 380 site of i-Tunes U near the bottom of the file list under "Supplemental Homework - Chapter 8"
8-1. AEH, Inc. just paid a $1.00 dividend and is expected to pay a $1.06 dividend next year. What is AEH’s capital gains yield (growth rate, “g”)?
8-2. XYZ, Inc. stock sells for $50.00 and is expected to sell for $54.50 next year. What is XYZ’s capital gains yield...

...FIN 350
Prof. Porter
ProblemSet 4
1. Describe what happens to the total risk of a portfolio as the number of securities is increased. Differentiate between systematic risk and unsystematic risk and explain how total risk and systematic risk are measured.
As the number of securities increases, the total risk of the portfolio decreases. This decrease occurs due to the benefits of diversification which is the process of acquiring a portfolio...

...ProblemSets
Chapter 5
A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?
Calculating PV factor:
i= required return = 9% = 0.09
n= 10 years
Using Cash Flow of $1000 to calculate present value,
Cash flow= $1000
PV factor = 1/(1+i)^n = 0.42241
PV = $1000*0.42241= 422.41
Using Coupon Rate to calculate present value of...

...A-3 (Coverage ratio) The firm in the two preceding problems also had $6 million of principal repayments during the latest 12 months. Its marginal tax rate is 40%. Calculate the debt service coverage ratio.
Debt-Service Coverage Ratio = (EBIT + 1/3 Rentals) / (Interest Expense + 1/3 Rentals + Principal Repayments / (1 - T)) = ($30 + $15 / 3) / ($10 + $15 / 3 + $6 / (1 - 0.40)) = 1.40
A-4 (WACC with rebalancing) Nathan’s Catering is a gourmet catering service located in...

...TextProblemSets
A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a
required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?
Number of years (N) = 10, future value (FV) = 1000, interest rate (I/YR) = 9
0.074 * 1000 = 74 = PMT or annual payment, I then pressed CPT on my financial calculator to compute the price of the bond and then pressed PV or present value.
The fair...

...Marked ProblemSet2 - Solution Notes
1. First, compute the correlation coeﬃcient between assets A and B
ρ(RA , RB ) =
Cov (RA , RB )
−0.0322
=
= −1.
σ (RA )σ (RB )
0.14 × 0.23
The assets are perfectly negatively correlated. Consider portfolio P formed from assets
A and B such that you invest α fraction of your wealth into A and (1 − α) fraction
into B. The variance of such portfolio is
σ (RP )2 =
=
=
=
α2 σ (RA...

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