P2
2. Judy Johnson is choosing between investing in two Treasury securities that mature in five years and have par values of $1,000. One is a Treasury note paying an annual coupon of 5.06 percent. The other is a TIPS which pays 3 percent interest annually.

a. If inflation remains constant at 2 percent annually over the next five years, what will be Judy's annual interest income from the TIPS bond? From the Treasury note?

b. How much interest will Judy receive over the five years from the Treasury note? From the TIPS?

c. When each bond matures, what par value will Judy receive from the Treasury note? The TIPS?

d. After five years, what is Judy's total income (interest + par) from each bond? Should she use this total as a way of deciding which bond to purchase?

P4
4. Assume a $1,000 face value bond has a coupon rate of 8.5 percent, pays interest semi-annually, and has an eight-year life. If investors are willing to accept a 10.25 percent rate of return on bonds of similar quality, what is the present value or worth of this bond?

P6
6. The Garcia Company's bonds have a face value of $1,000, will mature in ten years, and carry a coupon rate of 16 percent. Assume interest payments are made semi-annually.

a. Determine the present value of the bond's cash flows if the required rate of return is 16.64 percent.

b. How would your answer change if the required rate of return is 12.36 percent?

P26
26. Mercier Corporation's stock is selling for $95. It has just paid a dividend of $5 a share. The expected growth rate in dividends is 8 percent. a. What is the required rate of return on this stock?

b. Using your answer to (a), suppose Mercier announces developments that should lead to dividend increases of 10 percent annually. What will be the new value of Mercier's stock?

c. Again using your answer to (a), suppose developments occur that leave...

...Week 3 Time Value of Money and Valuing Bonds
Chapter 6
55. Amortization with Equal Payments Prepare an amortization schedule for a five-year loan of $36,000. The interest rate is 9 percent per year, and the loan calls for equal annual payments. How much interest is paid in the third year?
Answer: $2,108.52
56. Amortization with Equal Principal Payments Rework Problem 55 assuming that the loan agreement calls for a principal reduction of $7,200 every year instead of equal annual payments.
Answer: $1,944.00
57. Calculating Annuity Values Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with retirement income of $20,000 per month for 20 years, with the first payment received 30 years and 1 month from now. Second, he would like to purchase a cabin in Rivendell in 10 years at an estimated cost of $325,000. Third, after he passes on at the end of the 20 years of withdrawals, he would like to leave an inheritance of $750,000 to his nephew Frodo. He can afford to save $2,000 per month for the next 10 years. If he can earn an 11 percent EAR before he retires and an 8 percent EAR after he retires, how much will he have to save each month in years 11 through 30?
Answer: $2,259.65
58. Calculating Annuity Values After deciding to buy a new car, you can either lease the car or purchase it on a three-year loan. The car you wish to buy costs $28,000. The...

...Managerial Finance
Chapter 5, Quiz
Name: Emily Smith
Multiple Choice: Please circle the correct answer choice
. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
a. The company’s bonds are downgraded.
b. Market interest rates rise sharply.
c. Market interest rates decline sharply.
d. The company's financial situation deteriorates significantly.
e. Inflation increases significantly.
. A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?
a. If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current price.
b. The bond is selling below its par value.
c. The bond is selling at a discount.
d. If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.
e. The bond’s current yield is greater than 9%.
. Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?
a. 10-year, zero coupon bond.
b. 20-year, 10% coupon bond.
c. 20-year, 5% coupon bond.
d. 1-year, 10% coupon bond.
e. 20-year, zero coupon bond.
. Which of the following...

...Bond P is a premium bond with a 12 percent coupon. Bond D is a 6 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 9 percent, and have five years to maturity. The current yield for Bonds P and D is percent and percent, respectively. (Do not include the percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16)) |
If interest rates remain unchanged, the expected capital gains yield over the next year for Bonds P and D is percent and percent, respectively. (Do not include the percent signs (%). Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16)) |
Explanation:
To find the capital gains yield and the current yield, we need to find the price of the bond. The current price of Bond P and the price of Bond P in one year is: |
P: | P0 = $120(PVIFA9%,5) + $1,000(PVIF9%,5) = $1,116.69 |
| |
| P1 = $120(PVIFA9%,4) + $1,000(PVIF9%,4) = $1,097.19 |
| |
| Current yield = $120 / $1,116.69 = .1075 or 10.75% |
| |
| The capital gains yield is: |
| |
| Capital gains yield = (New price – Original price) / Original price |
| |
| Capital gains...

...
Advance Finance
Insert Name
Insert Institution
Advance Finance
Question 1: Periodic Interest Rates
Calculating Periodic Rate and Effective Annual Interest Rate
Applied Formula by Fouque and Papanicolaou (2011):
Effective interest rate per period, (i) = ( 1 + ( r / m ) )m – 1
Effective interest rate for t periods, it = ( 1 + i )t - 1
or a single equation it = ( 1 + ( r / m ) )mt - 1.
The rate per compounding period P = R / m, in percent.
Where: r = R/100 and i = I/100 (p. 124)
Filled Table (Rounded to two decimal places)
Period
Annual percentage rate (APR)
Compounding per Period (m)
Periodic rate/
Periodic Interest Rate (P)
Effective Annual Rate
(i)
Semiannual
9%
2
4.50%
9.20%
Quarterly
10%
4
2.50%
10.38%
Monthly
8.5%
12
0.71%
8.84%
Daily
3.25%
365
0.01%
3.30%
Question 2: Periodic Interest Rate
Given:
This is a Saving Account, no adding or withdrawing from the account
Which is favorable?
Daily compound rate of 0.045%
Weekly compounded rate of 0.285%
Monthly compounded rate of 1.15%
Quarterly compounded rate of 4.325%
Semiannual compounded rate of 8.5%
(i) An interest rate compounded annually is favorable, since it yields the highest Effective Annual Rate of Interest, and will accumulate more interest after the given period.
Period
Annual percentage rate (APR)
Compounding per Year
Periodic rate
Periodic Interest Rate (P)...

...current yield is 10 percent.
Q6 Which of the following is not correct[This question carries 1 mark]
(a)Liquidity in a financial market refers to how easy it is to buy or sell a security in the secondary market when you want to without incurring significant costs.
(b)When money serves as the item in which prices are denoted, money is serving the role of unit of account
(c)Outside money is also known as fiat money
(d) If you withdraw $500 out of your checking account, M1 would increase
(e)Money created in the private sector, such as checking accounts at banks, is inside money
Q7.Why Do Bond Prices Go Up and Down? (Ch 4, pages, and also pages 61-62, 68, 69, and 70)
With bond investing, prices go up and down because of two factors: change in interest rates and changes in quality of credit. Managing interest rate risk has become the most critical variable in the management of bond portfolios.
Chapter 4
Q 8 The following 10 questions are Multiple Choice Question. Mark(Select) the appropriate answer(each carry 1 mark)
(i) The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.
A) future value
B) present value
C) interest
D) deflation
(ii) The present value of an expected future payment ________ as the interest rate increases.
A) rises
B) falls
C) is constant
D) is unaffected
(iii) If a $5,000...

...CHAPTER 3
Valuing Bonds
Answers to Problem Sets
1. a. Does not change
b. Price falls
c. Yield rises.
2. a. If the coupon rate is higher than the yield, then investors must be
expecting a decline in the capital value of the bond over its remaining life. Thus, the bond’s price must be greater than its face value.
b. Conversely, if the yield is greater than the coupon, the price will be below
face value and it will rise over the remaining life of the bond.
3. The yield over 6 months is 3.965/2 = 1.79825%.
Therefore, PV = 3/1.0179825 + 3/1.01798252 +…. + 103/1.017982534 = 130.37
4. Yields to maturity are about 4.3% for the 2% coupon, 4.2% for the 4% coupon, and 3.9% for the 8% coupon. The 8% bond had the shortest duration (7.65 years), the 2% bond the longest (9.07 years).
5. a. Fall (e.g., 1-year 10% bond is worth 110/1.1 5 100 if r 5 10% and is worth
110/1.15 = 95.65 if r = 15%).
b. Less (e.g., See 5a).
c. Less (e.g., with r = 5%, 1-year 10% bond is worth 110/1.05 = 104.76).
d. Higher (e.g., if r = 10%, 1-year 10% bond is worth 110/1.1 = 100, while 1-
year 8% bond is worth 108/1.1 = 98.18).
e. No, low-coupon bonds have longer durations (unless there is only one
period to maturity) and are therefore more volatile (e.g., if r falls from 10% to 5%, the value of a...

...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...

...Long term Debt Finance Questions 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 the bond.
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...

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