Question

.

value:

1.00 points

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Problem 10-2 Bond value [LO3]

Applied Software has $1,000 par value bonds outstanding at 16 percent interest. The bonds will mature in 20 years.

Compute the current price of the bonds if the present yield to maturity is(Round “PV Factor” to 3 decimal places, intermediate and final answers to2 decimal places. Omit the “$” sign in your response):

Price of the

bond

(a) 8 percent

$

(b) 14 percent

$

(c) 11 percent

$

2.

value:

1.00 points

Problem 10-4 Bond value [LO3]

Barry’s Steroids Company has $1,000 par value bonds outstanding at 14 percent interest. The bonds will mature in 40 years.

If the percent yield to maturity is 12 percent, what percent of the total bond value does the repayment of principal represent? Use.mhhe.com/connect/0073530727/Images/Appendix_B.jpg”>Appendix Band.mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix D.(Round intermediate calculations to 2 decimal places, “PV Factor” and final answer to 3 decimal places. Omit the “%” sign in your response.)

Principal repayment

%

3.

value:

1.00 points

Problem 10-5 Bond value [LO3]

Essex Biochemical Co. has a $1,000 par value bond outstanding that pays 14 percent annual interest. The current yield to maturity on such bonds in the market is 9 percent. Use.mhhe.com/connect/0073530727/Images/Appendix_B.jpg”>Appendix Band.mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix D.

Compute the price of the bonds for these maturity dates(Round “PV Factor” to 3 decimal places, intermediate and final answers to 2 decimal places. Omit the “$” sign in your response):

Price of the

bond

(a) 40 years

$

(b) 17 years

$

(c) 5 years

$

4.

value:

2.00 points

Problem 10-8 Interest rate effect [LO3]

Refer to.mhhe.com/connect/0073530727/Images/Table%2010-1.JPG”>Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) go from 10 percent to 9 percent.

(a)

What was the bond price at 10 percent?(Round “PV Factor” to 3 decimal places, intermediate calculations and final answers to 2 decimal places. Omit the “$” sign in your response.)

Bond price

$

(b)

What is the bond price at 9 percent?(Round “PV Factor” to 3 decimal places, intermediate calculations and final answers to 2 decimal places. Omit the “$” sign in your response.)

Bond price

$

(c)

What would be your percentage return on the investment if you bought when rates were 10 percent and sold when rates were 9 percent?(Round “PV Factor” to 3 decimal places, intermediate calculations and final answers to 2 decimal places. Enter the value as positive value. Omit the “%” sign in your response.)

on investment

%

5.

value:

1.00 points

Problem 10-11 Effect of maturity on bond price [LO3]

Refer to.mhhe.com/connect/0073530727/Images/Table%2010-2.JPG”>Table 10-2

(a)

Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. Using column 2, indicate what the bond price will be with a 5-year, a 25-year, and a 30-year time period.(Round “PV Factor” to 3 decimal places, intermediate calculations and final answers to 2 decimal places. Omit the “$” sign in your response.)

Maturity

Bond price

5 Years

$

25 years

30 years

(b)

Assume the interest rate in the market (yield to maturity) goes up to 12 percent for the 10 percent bonds. Using column 3, indicate what the bond price will be with a 5-year, a 25-year, and a 30-year period.(Round “PV Factor” to 3 decimal places, intermediate calculations and final answers to 2 decimal places. Omit the “$” sign in your response.)

Maturity

Bond price

5 Years

$

25 years

30 years

(c)

Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. If interest rates in the market are going down, which bond would you choose to own?

Shortest-term bond

Longest-term bond

(d)

Assume the interest rate in the market (yield to maturity) goes up to 12 percent for the 10 percent bonds. If interest rates in the market are going up, which bond would you choose to own?

Longest-term bond

Shortest-term bond

6.

value:

1.00 points

Problem 10-13 Effect of yield to maturity on bond price [LO3]

Tom Cruise Lines, Inc., issued bonds five years ago at $1,000 per bond. These bonds had a 30-year life when issued and the annual interest payment was then 15 percent. This return was in line with the required returns by bondholders at that point as described below:

Real rate of return

5

%

Inflation premium

6

Risk premium

4

Total return

15

%

Assume that five years later the inflation premium is only 2 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 25 years remaining until maturity.

Compute the new price of the bond. Use.mhhe.com/connect/0073530727/Images/Appendix_B.jpg”>Appendix Band.mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix D.(Round “PV Factor” to 3 decimal places, intermediate and final answer to 2 decimal places. Omit the “$” sign in your response.)

New price

$

7.

value:

2.00 points

Problem 10-14 Analyzing bond price changes [LO3]

(a)

Find the present value of 3 percent × $1,000 (or $30) for 25 years at 12 percent. The $30 is assumed to be an annual payment. Use.mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix D. (Round “PV Factor” to 3 decimal places, intermediate and final answerto 2 decimal places. Omit the “$” sign in your response.)

Present value

$

(b)

Add the answer obtained in partato 1,000.(Round “PV Factor” to 3 decimal places, intermediate and final answerto 2 decimal places. Omit the “$” sign in your response.)

Present value

$

8.

value:

2.00 points

Problem 10-17 Deep discount bonds [LO3]

Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays 7 percent annual interest and has 16 years remaining to maturity. The current yield to maturity on similar bonds is 12 percent.

(a)

What is the current price of the bonds? Use.mhhe.com/connect/0073530727/Images/Appendix_B.jpg”>Appendix Band.mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix D. (Round “PV Factor” to 3 decimal places, intermediate and final answers to 2 decimal places. Omit the “$” sign in your response.)

Current price

$

(b)

By what percent will the price of the bonds increase between now and maturity?(Round “PV Factor” to 3 decimal places, intermediate and final answers to 2 decimal places. Omit the “%” sign in your response.)

Price increases by

%

9.

value:

1.00 points

Problem 10-19 Approximate yield to maturity [LO3]

Bonds issued by the Tyler Food Corporation have a par value of $1,000, are selling for $1,570, and have 20 years remaining to maturity. The annual interest payment is 14.5 percent ($145).

Compute the approximate yield to maturity.(Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “%” sign in your response.)

Approximate yield to maturity

%

10.

value:

2.00 points

Problem 10-22 Bond value-semiannual analysis [LO3]

You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 8 percent, which is paid semiannually. The yield to maturity on the bonds is 10 percent annual interest. There are 15 years to maturity. Use.mhhe.com/connect/0073530727/Images/Appendix_B.jpg”>Appendix Band.mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix D.

(a)

Compute the price of the bonds based on semiannual interest payments.(Round “PV Factor” to 3 decimal places, intermediate and final answer to 2 decimal places. Omit the “$” sign in your response.)

Price of the bonds

$

(b)

With 10 years to maturity, if yield to maturity goes down substantially to 8 percent, what will be the new price of the bonds?(Round “PV Factor” to 3 decimal places, intermediate and final answer to 2 decimal places. Omit the “$” sign in your response.)

New price

$

1

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