Lauringburg Case

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Financial Management 2013
Case 1: Laurinburg Precision Engineering HBS 9-193-098
1. The face value of each bond is $1000, to be paid in 5 years time. The effective rate of the bonds is 10% p/a, as dictated by the investor’s willingness to pay. The face value needs to be discounted to its present value, according to this effective rate (5% semi-annually for 10 6 month periods).

The market value (present value) of each $1000 bond is $613.91. 2.
Period| Date| Principal Due| Next Period Interest Expense| Payments| 0| 15-Jan-2004| $1,000,000.00| $50,000.00| $0.00|
1| 15-Jul-2004| $1,050,000.00| $52,500.00| $0.00|
2| 15-Jan-2005| $1,102,500.00| $55,125.00| $0.00|
3| 15-Jul-2005| $1,157,625.00| $57,881.25| $0.00|
4| 15-Jan-2006| $1,215,506.25| $60,775.31| $0.00|
5| 15-Jul-2006| $1,276,281.56| $63,814.08| $0.00|
6| 15-Jan-2007| $1,340,095.64| $67,004.78| $0.00|
7| 15-Jul-2007| $1,407,100.42| $70,355.02| $0.00|
8| 15-Jan-2008| $1,477,455.44| $73,872.77| $0.00|
9| 15-Jul-2008| $1,551,328.22| $77,566.41| $0.00|
10| 15-Jan-2009| $1,628,894.63| $0.00| $1,628,894.63|

3. The willingness to pay of these particular investors (aka the price) for the 10% coupon bonds is equal to the present value of the face value (using the acceptable yield of 8% as the effective rate) plus the present value of the 10 x $50 coupon payments. Present value of bond face value:

Present value of coupon payments:

WTP (price) = 675.56 + 405.55 = $1,081.11 per bond.
4. Using the same calculation method as in question 3, but reducing the period factor (t) by one after each period elapses: Period| Date| PV of face value| PV of remaining coupons| Market value of bond| 0| 15-Jan-2004| $675.56| $405.54| $1,081.11|

1| 15-Jul-2004| $702.59| $371.77| $1,074.35|
2| 15-Jan-2005| $730.69| $336.64| $1,067.33|
3| 15-Jul-2005| $759.92| $300.10| $1,060.02|
4| 15-Jan-2006| $790.31|...
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