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=
+
+
(
(
(
(
(
=
94 . 450 $ 62 . 540 $
) 040625 . 1 (
000 , 1 $
040625 . 0
) 040625 . 1 (
1
1
40 $
2
1
F
2
1
1
1
2
C
P
20
20
n 2
n 2
B
i
2
i
i
The firm can sell these bonds at $991.55.
Enter 20 4.0625% $40 $1,000
N i% PMT PV FV
Answer -$991.55
b. Amount needed to be raised = $1,000,000
Number of bonds sold = $1,000,000 / $991.55 = 1,009
c. Years to maturity = n = 10
Coupon rate = C = 0%
Current market rate = i = 8.125%
Assume semiannual coupon payments.
0 1 2 3 4 5 6 20
$0 $0 $0 $0 $0 $0 $0
$1,000
( )
( )
$450.94 = =
+
=
20 mn
mn
B
040625 . 1
000 , 1 $
m
1
F
P
i
Enter 20 4.0625% $0 $1,000
N i% PMT PV FV
Answer -$450.94
d. At the price of $450.94, the firm needs to raise $1 million. To do so, the firm will
have to issue:
Number of contracts = $1,000,000 / $450.94 = 2,218 contracts
8.27 Showbiz, Inc., has issued eight-year bonds with a coupon of 6.375 percent and
semiannual coupon payments. The markets required rate of return on such bonds is
7.65 percent.
a. What is the market price of these bonds?
b. If the above bond is callable after five years at an 8.5 percent premium on the
face value, what is the expected return on this bond?
LO 2, LO 4
Solution:
a. Years to maturity = n = 8
Coupon rate = C = 6.375%
Semiannual coupon = $1,000 (0.06375/2) = $31.875
Current market rate = i = 7.65%
Present value of bond = P
B
0 1 2 3 16
$31.875 $31.875 $31.875 $31.875
$1,000
( )
( )
$924.75 = + =
+
(
(
(
(
=
+
+
(
(
(
(
(
=
49 . 548 $ 26 . 376 $
) 03825 . 1 (
000 , 1 $
03825 . 0
) 03825 . 1 (
1
1
875 . 31 $
2
1
F
2
1
1
1
2
C
P
16
16
n 2
n 2
B
i
2
i
i
The firm can sell these bonds at $924.75.
b. Purchase price of bond = $924.75
Years investment held = n = 5
Coupon rate = C = 6.375%
Semiannual coupon = $1,000 (0.06375/2) = $31.875
Frequency of payment = m = 2
Realized yield = i
Call price of bond = CP = $1,000 (1.085) = $1,085.00
To compute the expected return, either the trial-and-error approach or the financial
calculator can be used. Try rates higher than the coupon rate.
Try i = 8%, or i/2 = 4%.
10
10
1
1-
(1 2)
2 2 (1 2)
1
1-
$1, 085 (1.04)
$924.75 $31.875
0.04 (1.04)
$258.54 $732.99 $991.53
(
(
+
= + (
+
(
(
(
(
= +
(
(
(
= + =
m n
B m n
C CP i
P
i i
Try a higher rate, i = 9.67% or i/2 = 4.835%.
10
10
1
1
(1 2)
2 2 (1 2)
1
1
$1, 085 (1.04835)
$924.75 $31.875
0.04835 (1.04835)
$248.11 $676.65 $924.77
(
+
= + (
+
(
(
(
(
= +
(
(
(
= + ~
m n
B m n
C CP i
P
i i
The realized rate of return is approximately 9.67% percent. Using a financial
calculator provided an exact yield of 9.6705 percent.
Enter 10 $31.875 -$924.75 $1,085
N i% PMT PV FV
Answer 4.835%
The effective annual yield can be computed as:
( )
2
(1 Quoted rate ) 1
1.04835 1
0.0990 9.90
= +
=
= =
m
EAY m
%