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...

...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....

...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...

...
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...

...Risk that can be eliminated by diversification is known as default risk
(e) If a stock's price is $20 at the beginning of a year and $17 at the end of the year, and it pays a dividend of $2 during the year, then the stock's 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...

...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...

...Management
Tutorials 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,...

...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...

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