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Swan Davis Inc.

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Swan Davis Inc.
1.
A Bonds
FV=1000 N=20 PMT=50 PV=1092 I=4.30
YTM=8.60%

2.
A Bond (YTC)
FV=1040 N=4 PMT=50 PV=1092 I=3.45
YTC=6.90%
The investor would likely get the YTC at 6.90%

3.
Inflation erodes the purchasing power of a bond 's future cash flows. A rise in inflation will cause investors to demand higher yields to compensate for inflation rate risk. Also, prices will tend to drop because the bond will be paying interest with less purchasing power.

A higher perceived risk would yield similar results to an inflation increase. Prices would decrease and required rates of return would increase. A decease in risk would increase the price and decrease the require rate of return.

A Bonds
FV=1000 N=20 PMT=50 PV=1092 I=4.30%
YTM=8.60%

A Bond under Inflation (YTM=10%)
FV=1000 N=20 PMT=50 I=5 PV=1000

WACC = wd*kd*(1-t) + we*ke + wp*kp
An increase in kd would increase the WACC raising the return on investment a project must meet to be undertaken.

4.
A Bonds YTM=8.60% with 10 years left to mature
B Bonds should be at least 8.60%. However, B Bonds have 23 years left to mature. Some financial problems led to a grade of BB, therefore, B Bonds can be given a YTM of 8.8% given in the text.

B Bonds
FV=1000 N=46 PMT=34.5 I=4.4 PV=813.88
The offer of $850 is higher than the valued $813.88.

B Bonds (TYC)
FV=1100 N=10 PMT=34.5 PV=813.88 I=6.81%
YTC=13.61%
B Bonds would not be called because the YTC>YTM

5.
Interest rate risk is a risk in which affects the current market price of bonds. The Current market price of a bond will have an inverse relationship with interest rates. When the interest rate increases and market demand also increases this will cause a decrease in the current market price of the bond and vice versa. SDI’s B bonds would have more interest rate risk.

Reinvestment rate risk is the risk that the investment might be stopped and that the investor might have to find a new place to invest the money. If this happens the

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