Lauringburg Case
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 |
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 |