fIN 301 HW 7 Chapter 9 PDF

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Ch 9, Homework problem 7...

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HW 7 Chapter 9 P9-3 Q1 (Related to Checkpoint 9.3) (Bond valuation)     Calculate the value of a bond that matures in 12 years and has a $ 1,000 par value. The annual coupon interest rate is 15 percent and the market’s required yield to maturity on comparable -risk bonds is 12 percent. The value of the bond is $ 1,185.83123 N=12 I/Y=12 PMT= $150 ($1,000 x.15) FV =$1,000 PV=-1185.83123 Similar Question Calculate the value of a bond that matures in 19 years and has a $ 1,000 par value. The annual coupon interest rate is 8 percent and the market's required yield to maturity on a comparable-risk bond is 11 percent. The value of the bond is $ 764.82117 N=19 FV=$1,000 I/Y= 11 PMT = $1,000 x .08 = 80 Calculate the value of a bond that matures in 14 years and has a $1,000 par value. The annual coupon interest rate is 12 percent and themarkets required yield to maturity on a comparable-risk bond is 14 percent. The value of the bond is $ 879.95857 N=14 FV=1000 I/Y=14 PMT = 1000x .12 = 120 Calculate the value of a bond that matures in 18 years and has a $1,000 par value. The annual coupon interest rate is 15 percent and the market's required yield to maturity on a comparablerisk bond is 8 percent. The value of the bond is $ 1656.03 Calculate the value of a bond that matures in 14 years and has a $1,000 par value. The annual coupon interest rate is 11 percent and the market's required yield to maturity on a comparablerisk bond is 8 percent. The value of the bond is $ 1247.32711 Calculate the value of a bond that matures in 13 years and has a $1,000 par value. The annual coupon interest rate is 16 percent and the market’s required yield to maturity on acomparable-risk bond is 8 percent. The value of the bond is $1632.30208

B9-3 Q2 Calculate the value of a bond that matures in 12 years and has a $1,000 par value. The annual coupon interest rate is 8 percent and the market’s required yield to maturity on acomparable-risk bond is 12 percent. The value of the bond is $ 752.22503

P9-4 Q3 (Related to Checkpoint 9.4) (Bond valuation) A bond that matures in 10 years has a $1,000 par value. The annual coupon interest rate is 11 percent and the market’s required yield to maturity on a comparable-risk bond is 18 percent. What would be the value of this bond if it paid interest annually? What would be the value of this bond if it paid interest semiannually? a.

The value of this bond if it paid interest annually would be $ 685.41396

b.

The value of this bond if it paid interest semiannually would be $ 680.50090 Divide interest rate by 2, multiply periods by 2, divide payment by 2 (from annual)

B9-4 Q4 (Related to Checkpoint 9.4) (Bond valuation) A bond that matures in 10 years has a $1,000 par value. The annual coupon interest rate is 9 percent and the market's required yield to maturity on a comparable-risk bond is 15 percent. What would be the value of this bond if it paid interest annually? What would be the value of this bond if it paid interest semiannually? a.

The value of this bond if it paid interest annually would be $698.87388

b.

The value of this bond if it paid interest semiannually would be $694.16526

P9-7 Q5 (Related to Checkpoint 9.2) (Yield to maturity)    The market price is $1,125 for a 16-year bond ($1,000 par value) that pays 11 percent annual interest, but makes interest payments on a semiannual basis (5.5 percent semiannually). What is the bond's yield to maturity? The bond’s yield to maturity is 9.46

The market price is $1,200 for a 10-year bond ($1,000 par value) that pays 9 percent annual interest, but makes interest payments on a semiannual basis (4.5 percent semiannually). What is the bond's yield to maturity? The bond's yield to maturity is 6.28% N=20 PV=1200 PMT=45 FV=1000 (3.13842 x 2 = 6.27684) YIELD TO MATURITY MAKE SURE TO MULTIPLY BY 2

P9-8

A bond's market price is $1,100. It has a $1,000 par value, will mature in 6 years, and has a coupon interest rate of 8 percent annual interest, but makes its interest payments semiannually. What is the bond's yield to maturity? What happens to the bond's yield to maturity if the bond matures in 12 years? What if it matures in 3 years?

A. The bond's yield to maturity if it matures in 6 years is 5.99% N=12 PV=1100 PMT=40 FV=1000 = 2.99564 x 2 = 5.99128 B. The bond's yield to maturity if it matures in 12 years is 6.77% N=24 PV=1100 PMT=40 FV=1000 = 3.38478 x 2 = 6.76956

C. The bond's yield to maturity if it matures in 3 years is 4.41% N=6 PV=1100 PMT=40 FV=1000 = 2.0252 x 2 = 4.40504

P9-17 (Bond valuation relationships)  The 16-year, $1,000 par value bonds of Waco Industries pay 7 percent interest annually. The market price of the bond is $1,075, and the market's required yield to maturity on a comparablerisk bond is 5 percent. a. b. c.

Compute the bond's yield to maturity. Determine the value of the bond to you given the market's required yield to maturity on a comparable-risk bond. Should you purchase the bond?

What is your yield to maturity on the Waco bonds given the current market price of the bonds? N=16 PV=-1075 PMT=70 FV= 1000 I/Y = 6.24531 B. What should be the value of the Waco bonds given the market's required yield to maturity on a comparable-risk bond? $1216.76 N=16 I/Y=5 PMT=70 FV=1000 C. You should purchase the Waco bonds at the current market price because they are currently underpriced. A.

P9-18 (Bond valuation relationships) You own a bond that pays $120 in annual interest, with a $1,000 par value. It matures in 15 years. The market's required yield to maturity on a comparable-risk bond is 11 percent. a. Calculate the value of the bond. b. How does the value change if the yield to maturity on a comparable-risk bond (i) increases to 15 percent or (ii) decreases to 8 percent? c. Explain the implications of your answers in part b as they relate to interest-rate risk, premium bonds, and discount bonds. d. Assume that the bond matures in 5 years instead of 15 years and recalculate your answers in parts a and b. e. Explain the implications of your answers in part d as they relate to interest-rate risk, premium bonds, and discount bonds. a. What is the value of the bond if the market's required yield to maturity on a comparable-risk bond is 11 percent? $1071.91 N=15 I/Y=11 PMT=120 FV=1000 = PV = 1071.90870

b. i.

What is the value of the bond if the yield to maturity on a comparable-risk bond increases to 15 percent? $824.58 N=15 I/Y=15 PMT=120 FV=1000 = PV = 824.57890

ii.

What is the value of the bond if the yield to maturity on a comparable-risk bond decreases to 8 percent? $1342.38 (N=15 I/Y=8 PMT=120 FV=1000) = PV = 1342.37915

c. The change in the value of a bond caused by changing interest rates is called interest-rate risk. Based on the answers in part b, a decrease in interest rates (the yield to maturity) will cause the value of a bond to increase by contrast, an increase in interest rates will cause the value to decrease. Also, based on the answers in part b, if the yield to maturity (current interest rate) equals the coupon interest rate, the bond will sell at par exceeds the bond's coupon rate, the bond will sell at a discount; and is less than the bond’s coupon rate, the bond will sell at a premium.

d. Assume the bond matures in 5 years instead of 15 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 11 percent? $1036.96 N=5 I/Y=11 PMT=120 FV=1000 = 1036.95897 Assume the bond matures in 5 years instead of 15 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 15 percent? $899.44 N=5 I/Y=15 PMT=120 FV=1000 =899.43535 Assume the bond matures in 5 years instead of 15 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 8 percent? $1159.71 N=5 I/Y=8 PMT=120 FV=1000 =PV=1159.70840 e. From the findings in part d, we can conclude that a bondholder owning a long-term bond is exposed to more interest-rate risk than one owning a short-term bond. P9-23 (Related to Checkpoint 9.6) (Inflation and interest rates) What would you expect the nominal rate of interest to be if the real rate is 4.3 percent and the expected inflation rate is 6.7 percent? The nominal rate of interest would be 11.29% ((1 + .043)(1 + 6.7))- 1 = .112881

CHAPTER 10 P10-1 (Measuring growth) If Pepperdine, Inc.'s return on equity is 18 percent and the management plans to retain 57 percent of earnings for investment purposes, what will be the firm's growth rate? .18 x .57 = 10.26% P10-2 (Measuring growth) If the Stanford Corpoation's net income is $225 million, its common equity is $874million, and management plans to retain 72 percent of the firm's earnings to finance new investments, what will be the firm's growth rate? The firm's growth rate will be 18.54% net income/common equity x retained earnings = growth rate 225/874 x .72 = 18.546910755148741487643020595

P10-3 (Related to Checkpoint 10.1) (Common stock valuation) Header Motor, Inc., paid a $4.24 dividend last year. At a constant growth rate of 7 percent, what is the value of the common stock if the investors require a 15 percent rate of return? The value of the common stock is $56.71 4.24(1+.07) / .15-.07 = 56.71...