finance
Bond contracts include specific terms, including all of the following EXCEPT
the price at which the bond will be sold in the bond market.
Marketability is the ability of an investor
to sell a security quickly, at a low transaction cost, and at a price close to its fair market value.
The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that the bond compounds interest semiannually. What will be the current market price of these bonds if the yield to maturity for similar investments in the market is 6.75 percent? (Round your answer to the nearest dollar.)
urrent price=Face value/(1+interest rate/2)^(2*time period) =1000/(1+0.06/2)^(2*10) =1000/(1+0.03)^(20) =1000/(1.03)^(20) =1000*0.553675754 =$554(Approx)
In calculating the current price of a bond paying semiannual coupons, one needs to
use double the number of years for the number of payments made. use the semiannual coupon. use the semiannual rate as the discount rate. **all of the above need to be done.
You have received a share of preferred stock that pays an annual dividend of $10. Similar preferred stock issues are yielding 22.5%. What is the value of this share of preferred stock? (Round answer to two decimal places.)
value of this share of preferred stock = Annual dividend / Yield = $10 / 0.225 = $44.44
The discount rate that makes the present value of a bond's coupons and principal payment equal to its price is the:
yield to maturity.
The bonds that has no coupon payments but promise a single payment at maturity is:
zerocoupon bonds.
You have won the lottery and will receive 20 annual payments of $10,000 starting today. If you can invest these payments at 8.5%, what is the present value of your winnings? (Round the final answer to the nearest dollar.)
$102,677 Present value of inflows=cash inflow*Present value of annuity factor(rate%,time period)(Beginning of year compounding) =$10,000+$10,000/1.085+$10,000/1.085^2+$10,000/1.085^3+............+$10,000/1.085^19 which is equal to =$10,000*10.26772022(Approx) =$102677(Approx)(Please note that intermediate calculations have not been rounded off].
Tim Dodson has borrowed $8,600 to pay for his new car. The annual interest rate on the loan is 9.4 percent, and the loan needs to be repaid in four payments. What will be his annual payment if he begins his payment beginning now? (Round to the nearest dollar.)
$2,448 PVAD = P * (1 - (1 / (1 + r)n / r) * (1 + r) where, PVD is the present value of annuity due, P is the periodical amount = $8600, r is the rate of interest = 9.4% and n is the time period = 4 Now, putting these values in the above formula, we get, $8600 = P * (1 - (1 / (1 + 9.4%)4 / 9.4%) * (1 + 9.4%) $8600 = P * (1 - (1 / (1 + 0.094)4 / 0.094) * (1 + 0.094) $8600 = P * (1 - (1 / (1.094)4 / 0.094) * (1.094) $8600 = P * (1 - (1 / 1.4324164109) / 0.094) * (1.094) $8600 = P * ((1 - 0.6981210159214045) / 0.094) * (1.094) $8600 = P* (0.3018789840785955 / 0.094) * (1.094) $8600 = P * 3.211478554027612 * 1.094 $8600 = P * 3.513357538106208 P = $8600 / 3.513357538106208 P = $2448
What is the value of this 20 year lease? The first payment, due one year from today is $2,000 and each annual payment will increase by 4%. The discount rate used to evaluate similar leases is 9%. (Round final answer to the nearest whole dollar.)
$24,361
Brandon Ramirez wants to set up a scholarship at his alma mater. He is willing to invest $320,000 in an account earning 11 percent annually. What will be the annual scholarship that can be given from this investment? (Round to the nearest dollar.)
$35,200 CASHFLOW/RATE 320000=CASHFLOW/11% 320000*11%=35,200
Damien McCoy has loaned money to his brother at an interest rate of 5.85 percent. He expects to receive $987, $1,012, $1,062, and $1,162 at the end of the next four years as complete repayment of the loan with interest. How much did he loan out to his brother? (Round to the nearest dollar.)
$3657 loan 1: 987*1/1.0585 loan 2: 1012*1/.0585^2 loan 3: 1062*1/.0585^3 loan 4: 1162*1/.0585^4
Nick invested $2,000 in a bank savings account today and another $2000 a year from now. If the bank pays interest of 10 percent per year, how much money will Nick have at the end of two years?
$4,620
Shana Norris wants to buy five-year zero coupon bonds with a face value of $1,000. Her yield to maturity is 8.5 percent. Assuming annual compounding, what would be the current market price of these bonds? (Round your answer to the nearest dollar.)
$665
Stowell earns 20% interest compounded annually on his savings. He will deposit $1,500 today, $1,650 one year from today, and $1,820 two years from today. What will be the account balance three years from today? (Round intermediate calculations to nearest four decimals.)
$7,152 Work: Year 0: $1,500 x (1+ 20%)³ Year 1: $1,650 x (1+ 20%)³⁻¹ Year 2: $1,820 x (1+ 20%)³⁻² Sum: $7,152
Milner is saving for her retirement. She will make a deposit into her IRA account at the end of each quarter for the next 36 years. The expected return on the account is 8%. How much will she have to deposit each quarter to have $650,000 in the account when she retires 36 years from today? (Round the final answer to the nearest two decimals.)
$796.81 Future Value of Annuity =P ( (1 + r)n - 1 ) / r 650000 =P* ((1 + 8%/4)^144 - 1) / (8%/4) 650000 =815.754461044191 * P P =650000 / 815.754461044191 P =796.81
Which one of the following statements is true of a bond's yield to maturity?
-The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. -It is the annual yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised. -A bond's yield to maturity changes daily as interest rates increase or decrease. ****All of the above are true.
Which one of the following statements is true of a bond's yield to maturity?
-the yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. -It is the annual yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised. -A bond's yield to maturity changes daily as interest rates increase or decrease. *****All of the above are true.
Which of the following statements is true? -As interest rates decline, the prices of bonds rise and as interest rates rise, the prices of bonds decline. -All other things being equal, short-term bonds are riskier than long-term bonds. -Long-term bonds have lower price volatility than short-term bonds of similar risk. -Interest rate risk decreases as maturity increases.
As interest rates decline, the prices of bonds rise and as interest rates rise, the prices of bonds decline.
Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for $981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment? (Round to the nearest percent.)
10% Realized yield = 1,067.22 / 981.10 - 1
Shawna Carter wants to invest her recent bonus in a four-year bond that pays a coupon of 11 percent semiannually. The bonds are selling at $962.13 today. If she buys this bond and holds it to maturity, what would be her yield? (Round to the closest answer.)
12.2%
Newship Inc. has borrowed from its bank at a rate of 8 percent and will repay the loan with interest over the next five years. Its scheduled payments, starting at the end of the year are as follows—$450,000, $560,000, $750,000, $875,000, and $1,000,000. What is the present value of these payments? (Round to the nearest dollar.)
2,815,884.91
You are evaluating a growing perpetuity investment from a large financial services firm. The investment promises an initial payment of $20,000 at the end of this year and subsequent payments that will grow at a rate of 3.4 percent annually. If you use a 9 percent discount rate for investments like this, what is the present value of this growing perpetuity?
20000/(9-3.4)=3571.43
Shaun Barringer has started on his first job. He plans to start saving for retirement. He will invest $5,000 at the end of each year for the next 45 years in a fund that will earn an annual return of 10 percent. How much will Shaun have at the end of 45 years? (Round to the nearest dollar.)
3,594,524 future value of annuity = annual payment * [(1+i)^n - 1]/i => future value = 5000 * [(1+10%)^45 -1]/10%
Three years ago, Joe bought a 5-year, 10% coupon paid semiannually bond for $1000. Currently, with interest rates having risen sharply, the bond is selling for $800 and you decide to sell it off. If you had re-invested the semi-annual coupons as you received them, what would your realized yield be over the 3-year holding period? Round to two decimal places.
3.63%.
Keys Corporation's 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.95%. The only difference between the two bonds, which are both extremely marketable and liquid is the chance of bankruptcy. . What is the default risk premium (DRP) on Keys' bonds?
7.00-5.95=1.05%
Jenny LePlaz is looking to invest in a five-year bond that pays annual coupons of 6.25 percent and currently sells at $912.34. What is the current market yield on such bonds? (Round to the closest answer.)z
8.5% Hence, YTM = Periodic Rate * No. of compounding periods in a year = 4.22% * 2 = 8.44%
Suppose an investor earned a semiannual yield of 6.4 percent on a bond paying coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round to two decimal places.)
= (1 + Semi annual yield)2 - 1 = (1 + 0.064)2 - 1 = 1.0642 - 1 = 1.132096 - 1 = 13.21% Approximately
Kevin Oh is planning to sell a bond that he owns. This bond has four years to maturity and pays a coupon of 10 percent on a semiannual basis. Similar bonds in the current market have a yield to maturity of 12 percent. What will be the price that he will get for his bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)
=PV(rate,nper,pmt,fv) =PV(12%/2,4*2,10%/2*1000,1000) =938
Which of the following classes of securities is likely to have the lowest corporate borrowing cost?
AAA rated bonds.
Which of the following statements is true? -The lower the transaction costs are, the greater a security's marketability. -The interest rate, or yield, on a security varies with its degree of marketability. -U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all debt securities. -All of the above are true.
All are true
Which of the following statements is true of zero coupon bonds? -Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity. -Zero coupon bonds sell well below their face value (at a deep discount) because they offer no coupons. -The most frequent and regular issuer of zero coupon securities is the U.S. Treasury Department. -All of the above are true.
All of the above are true.
Which of the following statements is true? -The largest investors in corporate bonds are institutional investors such as life insurance companies and pension funds. -The market for corporate bonds is thin compared to the market for corporate stocks. -Prices in the corporate bond market tend to be more volatile than prices of securities sold in markets with greater trading volumes. -All of the above are true.
All of the above are true.
Which of the following statements is true? -The largest investors in corporate bonds are institutional investors such as life insurance companies and pension funds. -The market for corporate bonds is thin compared to the market for corporate stocks. -Prices in the corporate bond market tend to be more volatile than prices of securities sold in markets with greater trading volumes. -All of the above are true.
All the above are true
The effective annual rate (EAR) will equal the annual percentage rate (APR) if interest is compounded:
Annually EAR will equal the APR if interest is compounded annually
An investment pays 18 percent interest compounded quarterly. What is the effective annual interest rate? (Do not round intermediate calculations. Round the final answer to the nearest one decimal.)
Answer: 19.3% Explanation: Effective Annual Rate = (1 + (i / n)n ) - 1 Where i = Interest rate i.e 18% n = Number of compounding period i.e 4 (for quarterly compounding) Effective Annual Rate = (1 + (i / n)n) - 1 = (1 + (0.18 / 4 )4 ) - 1 = (1 + (1.045)4 ) - 1 = 19.252% Effective Annual Rate = 19.3%
Which one of the following statements is NOT true? -The market for corporate bonds is thin compared to the market for corporate stocks. -The largest investors in corporate bonds are life insurance companies and pension funds. -Corporate bonds are more marketable than the securities that have higher daily trading volumes. -Prices in the corporate bond market tend to be more volatile than the markets for stocks or money market securities.
Corporate bonds are more marketable than the securities that have higher daily trading volumes.
Which one of the following statements about vanilla bonds is NOT true? -The bond's coupon rate is calculated as the annual coupon payment divided by the bond's face value. -They have fixed coupon payments. -The face value, or par value, for most corporate bonds is $1,000. Coupon payments are usually made quarterly.
Coupon payments are usually made quarterly.
Which of the following is NOT a typical way in which interest rates are quoted in the marketplace?
Discounted interest rate
The present value of an annuity due is less than the present value of an ordinary annuity.
FALSE
Bonds with a call provision pay lower yields than comparable noncallable bonds.
False
Higher coupon bonds have greater interest rate risk.
False
Prices in the corporate bond market tend to be less volatile than prices of securities sold in markets with greater trading volumes
False
To determine the monthly payment on a one-year loan, divide the amount of the loan by 12.
False
When interest rates change, the prices of lower-coupon bonds change less than the prices of higher-coupon bonds.
False
Which of the following theorems explains the relationship between interest rates and bond prices?
For a given change in interest rates, the prices of long-term bonds will change more drastically than the prices of short-term bonds.
Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon of 15 percent semiannually. Today, the bond is priced at $961.22. If she sold the bond today, what would be her realized yield? (Round to the nearest percent.)
Here, Nper = 7*2 = 14, PMT = $1,000*15%*1/2 = $75, PV = $921.77 and FV = $961.22 [we use 2 since the bond is semi-annual] Using these values in the above formula/function for Rate, we get, Realized Yield = Rate(14,75,-921.77,961.22)*2 = 16.62% which is closest to 17%
Which of the following statements is true? -If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond. -If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond. -For a given change in market interest rates, the prices of higher-coupon bonds change more than the prices of lower-coupon bonds. -If market interest rates rise, bond prices will rise.
If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.
Stuart Weddle's father is 55 years old and wants to set up a cash flow stream that would be forever. He would like to receive $15,000 every year, beginning at the end of this year. If he could invest in account earning 9 percent annually, how much would he have to invest today to receive his perpetual cash flow? (Round to the nearest dollar.)
In order to receive perpetual cash flow, amount required to be invested = Desired Cash flow/ Required rate of return = 15000/ 9% =$ 166,666.66
James Perkins wants to have a million dollars at retirement, which is 15 years away. He already has $200,000 in an IRA earning 8 percent annually. How much does he need to save each year, beginning at the end of this year, to reach his target? Assume he could earn 8 percent annually on any investment he makes. (Round to the nearest dollar.)
James need $1,000,000 after 15 years His IRA deposit $200,000, earning @8% per annum Maturity value of $200,000 after 15 years =200000*1.08^15= $634,434 Balance fund needed after 15 years =$365,566 Formula for future value of Annuity : FV= A [ (1+k)n-1/k] FV = Future annuity value=365,566 A = periodical (yearly) investment=? K=interest rate=8% per year N=periods=15 years Now, 365,566= A[(1.08)^15-1]/0.08 A=13,464 So James needs to save $13,464 each year end to reach his target
Kevin Rogers is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent. What should be the current price of this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)
Maturity (n) = 5 years. Coupon rate (r) = 10%. Coupon payment times (m) = 2 times. Yield to maturity (YTM) = 8.8%. Fave value (Assumed) (FV) = $1,000. No of periods (N) = mxn = 5*2 = 10. Calculation of bond price (PV) by using financial calculator: Step 1. FV = $1,000. Step 2. N = 10. Step 3. I/y = 4.4 (YTM ÷ m). Step 4. PMT = $50. ($1000*10%* 6÷12). Step 5. CPT - PV. Accordingly, PV will be $1,047.71.
Surreal Corp. has borrowed to invest in a project. The loan calls for a payment of $17,500 every month for three years. The lender quoted Surreal a rate of 8.40 percent with monthly compounding. At what rate would you discount the payments to find the amount borrowed by Surreal Corp.? (Round to two decimal places.)
Monthly interest rate = 8.40% / 12 = 0.7% Effective annual rate = (1 + 0.007)12 -1 Effective annual rate = 0.0873 or 8.73%
Generic Inc. issued bonds in 1988 that will mature 16 years from the date of issue. The bond pays a 14.375 percent coupon and the interest is paid semiannually. Its current price is $1,508.72. What is the effective annual yield on the bonds? (Round your answer to two decimal places.)
N = 32 (16 x 2) PMT = 71.875 (1000 x 14.375% / 2) PV = 1508.72 FV = -1000 Solve for I = 4.25 x 2 = 8.5% In financial calculator: 32 [N] 71.875 [PMT] 1508.72 [PV] 1000 [+/-] [FV] [CPT] [I/Y] = 4.25 * 2 = 8.5%
Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Do not round intermediate computations. Round your final answer to the nearest dollar.)
Nper (I) = 20*2 = 40 (indicates teh period over which interest payments will be made) PMT = 1000*7.8%*1/2 = 39 (indicates semi-annual interest payment) Rate = 7%/2 (indicates market rate) FV = 1000 (indicates the face value of bonds) PV = ? (indicates current selling price) Current Selling Price = PV(Rate,Nper,PMT,FV) = PV(7%/2,40,39,1000) = 1085.42 or 1085
Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)
Nper = 10 PMT = 1000*.07 = 70 Rate = 9% FV = 1000 Present Value = PV(rate,nper,pmt,fv) = PV(9%,10,70,1000) = 871.65 or 872 Answer is 872
Dawson Electricals has borrowed $27,850 from its bank at an annual rate of 8.5 percent. It plans to repay the loan in eight equal installments, beginning in a year. What is its annual loan payment? (Round to the nearest dollar.)
PMT = ? (indicates annual payment) Rate = 8.5% (indicates interest rate) Nper = 8 (indicates the number of installments) PV = 27850 (indicates the value of loan) FV = 0 (not relevant in this case) Annual Payment = PMT(Rate,Nper,PV,FV) = PMT(8.5%,8,-27850,0) = 4938.66 The answer is 4938.66.
You are purchasing a used car and will make 5 annual payments of $3,500 starting one year from today. If your funds could be invested at 9%, what is the present value of the car? (Round the final answer to the nearest dollar.
PMT*(1-(1/(1+R^N)))/R 3500*(1-(1/(1.09^5)))?0.09 $13,614
Cavincare has 50 years remaining on a service contract with Martin, Inc. Today, Martin paid $120,000 for services received last year and the annual payment increases by 2.5% each year. The firm's required rate of return is 15%. What is the value of the contract to Cavincare? (Do not round intermediate calculations. Round the final answer to the nearest whole dollar amount.)
PV = 120000 x (1 + 1.025/1.15 + (1.025/1.15)^2 +... + (1.025/1.15)^50) = 120000 x (1 - (1.025/1.15)^50)/(1 - 1.025/1.15) = 980878.65
Mary just bought a 20-year bond with an 8% coupon rate (paid semi-annually) and $1000 par value for $1050. She is expecting an effective annual yield (EAY) of: (Round to two decimal places.)
Present Value (PV) = 1050 Coupon (PMT) = 1000*8%*1/2 = 40 FV = 1000 nper = 20*2 = 40 Rate = rate(nper,pmt,pv,fv) Rate = rate(40,40,-1050,1000) Rate = 3.756% Effective Annual Yeild = (1+0.03756)^2 - 1 Effective Annual Yeild = 7.65%
University Corp. issued five-year bonds that pay a coupon of 6.5 percent semiannually. The current market rate for similar bonds is 5.5 percent. How much will you be willing to pay for the bond today? Do not round intermediate calculations. Round your answer to the nearest dollar.
Present Value of the 10 semi annual coupon payment of $32.50 PV = P / i [1 - 1 / (1+ i)^n] PV = 32.50 / 0.0275 [1 - 1 / (1 + 0.0275)^10] = $280.80 PV of Maturity value of $1,000 = 1,000 / (1+0.0275)^10 = $762.40 Current Price of the Bond is = 280.80 + 762.40 = $1,043.20
Noel Klinger is planning to invest in an insurance company product. The product will pay $12,500 at the end of this year. Thereafter, the payments will grow annually at a 2.5 annual percent rate forever. Jack will be able to invest his cash flows at an annual rate of 5.5 percent. What is the present value of this investment cash flow stream? (Round to the nearest dollar.)
Present value of payment = Cash flow at the end of year / (Interest rate - growth rate) = 12500/(5.50% - 2.5%) = $416667 Thus answer will be $416667
Which of the following statements is true of annual percentage rate (APR)?
The APR is similar to the quoted interest rate, which is a simple annual rate.
Foodelicious Corp. is evaluating whether it should take over the lease of an ethnic restaurant in Manhattan. The current owner had originally signed a 25-year lease, of which 16 years still remain. The restaurant has been growing steadily at a 7 percent growth for the last several years. Foodelicious Corp. expects the restaurant to continue to grow at the same rate for the remaining lease term. Last year, the restaurant brought in net cash flows of $310,000. If the firm evaluates similar investments using a15 percent discount rate, what is the present value of this investment? (Round to the nearest dollar.)
The Present value = P/(r-g) *[1-(1+g/1+r)^n] where P = first payment, r= rate per year, g= growth rate and n =number of years In this case P = first payment = = last year payment *(1+g) =310,000*(1+0.07) = 331,700 r =15% =0.15 g = 0.07 n =16 Present value of an annuity = 331,700/(0.15-0.07) * [1-(1.07/1.15)^16] = 2,838,181.52 Present value of this investment = 2,838,182 (rounded to nearest dollar)
Which of the following statements is true of amortization?
The amortization schedule provides principal, interest, and unpaid principal balance for each month. Amortized loan is name for scheduled payment of principle and interest overtime. In the early periods, a larger proportion of scheduled payment goes towards interest. As time goes, the principle portion increases and interest portion decreases.
Robert White will receive cash flows of $4,450, $4,775, and $5,125from his investment. If he can earn 7 percent on any investment that he makes, what is the future value of his investment cash flows at the end of three years? (Round to the nearest dollar.)
The future value of investment will be calculated after compounding the initial investment with the given interest rate. Future value of investment= (present value (1+I)^n I= interest rate n= number of years. = (4450(1.07)^2+(4775(1.07)+(5125) (The payments are assumed to be received at end of the year) = (5094.805+5109.25+5125) = $15329.055.
Ransport Company has made an investment in another company that will guarantee it a cash flow of $37,250 each year for the next five years. If the company uses a discount rate of 15 percent on its investments, what is the present value of this investment? (Round to the nearest dollar.)
The present value of cash inflows = Annuity x [( 1+r)n -1 ] /r( 1+r)n = 37,250 x PVIFA, 15%, 5Or, 37,250 x 3.352 = $ 124,862
Raymond Bartz is trying to choose between two equally risky annuities, each paying $5,000 per year for five years. One is an ordinary annuity, the other is an annuity due. Which of the following statements is most correct?
The present value of the annuity due exceeds the present value of the ordinary annuity, and the future value of the annuity due also exceeds the future value of the ordinary annuity.
Which of the following statements is most true about zero coupon bonds?
They typically sell at a deep discount below par when they are first issued.
You are starting college this month, and your favorite aunt has agreed to give you $4,000 at the end of each of your four years and you can save $8,000 at the end of each year for the first two years after you graduate. If all of these amounts are invested at 14%, how much will you have to start graduate school, six years from now? (Round the final answer to the nearest dollar.)
Total 6 years FV: First four years = 4000 FV and Last 2 years = 8000 FV Future value = 4000 x (1+14%)^5 + 4000 x (1+14%)^4 + 4000 x (1+14%)^3 + 4000 x (1+14%)^2 + 8000 x (1+14%)^1 + 8000 x (1+14%)^0 Future Value = $42,702.07
All other things being equal, a given change in the interest rates will have a greater impact on the price of a low-coupon bond than a higher-coupon bond with the same maturity.
True
If a corporate bond's rating changes from AAA to AA, it means that its default risk has gone up.
True
In a typical loan amortization schedule involving a consumer loan, the amount of each loan payment is fixed.
True
Interest rate risk is the risk that bond prices will fluctuate as interest rate changes.
True
The default risk premium is based on the probability that a bond issuer will not fulfill all of a bond's contractual provisions.
True
The future value of an ordinary annuity is less than the future value of an annuity due.
True
Krysel Inc. is expecting a new project to begin producing cash flows at the end of this year. They expect cash flows to be as follows: 1 :$663,547 2 :$698,214 3:$795,908 4:$798,326 5:$755,444 If they can reinvest these cash flows to earn a return of 9.2 percent, what is the future value of this cash flow stream at the end of five years? (Round to the nearest dollar.)
We use the formula: A=P(1+r/100)^n where A=future value P=present value r=rate of interest n=time period. A=663547*(1.092)^4+698214*(1.092)^3+795908*(1.092)^2+798326*(1.092)+755444 =$4,429,046
John Wong purchased a five-year bond today at $1,034.66. The bond pays 6.5 percent semiannually. What will be his yield to maturity? (Round to the closest answer.)
YTM = (Coupon + (FV - PV) / t) / (FV + PV) / 2 YTM = (65 + (1,000 - 1,034.66) / 5) / (1,000 + 1,034.66) / 2 = 58.068 / 1,017.33 = 5.71% or 5.7%
Alice Trang is planning to buy a six-year bond that pays a coupon of 10 percent semiannually. Given the current price of $878.21, what is the yield to maturity on these bonds? (Round to the closest answer.)
YTM =( C + (F-P)/n) / ((F+P)/2) C= Semiannual interest payment = 1000*10%*5 = 50 F= Face value = 1000 P = Price = 878.21 n = number of semiannual to maturity = 6 years *2 =12 Hence, Semiannual YTM = ( 50 + (1000-878.21)/12) / ((1000+878.21)/2) = ( 50 + 10.14917) / 939.105 = 0.064049 Annual YTM =0.064049 *2 = 0.1281 = 13%
Highland Corp., a U.S. company, has a five-year bond whose yield to maturity is 6.5 percent. The bond has no coupon payments. What is the price of this zero coupon bond? (Assume semi-annual compounding for these zero-coupon bonds.)
Zero coupon bond value=F/(1+r)^t where F=face value=$1000(say) r=yield=6.5% t=time period=5 years hence price=1000/(1+0.065)^5 =$729.88(approx)
A firm receives a cash flow from an investment that will increase by 10 percent annually for an infinite number of years. This cash flow stream is called:
a growing perpetuity. This series of payment is growing for indefinite period of time at a constant rate
A preferred stock would be an example of:
a perpetuity.
If your investment pays the same amount at the beginning of each year for a period of 10 years, the cash flow stream is called:
an annuity due.
If your investment pays the same amount at the end of each year for a period of six years, the cash flow stream is called:
an ordinary annuity.
The Truth-in-Lending Act requires borrowers to disclose the:
annual percentage rate (APR).
If a bond's coupon rate is equal to the market rate of interest, then the bond will sell:
at a price equal to its face value.
The true cost of borrowing is the:
effective annual rate
The true cost of lending is the:
effective annual rate.
To calculate the future value of a series of cash flows, we can add up all the cash flows and then calculate their compounded value at the given rate of interest.
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Anna will receive $15,000 from a bank deposit in 2 years which has an interest rate of 3.5%. The amount of $15,000 represents the:
future value. Future value is the accumulated future value of the present value. Present value increases to future value at the interest rate of 3.5%
Bonds sell at a discount when the market rate of interest is:
greater than the bond's coupon rate.
In regard to interest rate risk, short-term bonds:
have less interest rate risk than longer-term bonds.
One reason why firms issue convertible bonds is that, the bonds can be sold for:
higher prices with lower interest rates.
Bonds sell at a premium when the market rate of interest is:
less than the bond's coupon rate.
The present value of multiple cash flows is:
less than the sum of the cash flows.
Regatta, Inc., has six-year bonds outstanding that pay an 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. How much will you be willing to pay for Regatta's bond today? Assume annual coupon payments. (Do not round intermediate computations. Round your final answer to the nearest dollar.)
let face value of bond =$1000 coupon payment =8.25% of 1000 = 82.5 => bond price = 82.5/(1.06875) + 82.5/(1.06875)^2+-----+ 82.5/(1.06875)^6 + 1000/(1.06875)^6 =$1065.79 so $1000 bond should be $1065.79 priced today
A consol, issued by the British government to finance the Napoleonic Wars is an example of:
perpetuity.
William deposited $25,000 today that would earn an interest at the rate of 3% for a period of 2 years. The amount of $25,000 represents the:
present value It will grow at an interest rate of 3% and the future value is $26522.5
Sid Phillips has funded a retirement investment with $250,000 earning a return of 6.75 percent annually. What is the value of the payment that he can receive in perpetuity? (Round to the nearest dollar.)
present value of perpetuity*required rate 250000*0.0675 $16,875
A client has expressed interest in a ten-year zero coupon bonds with a face value of $1,000. His opportunity cost is 7 percent. Assuming annual compounding, what would be the current market price of these bonds? Round to the nearest dollar.
price = 1000/(1+0.07)^10 = 508
A corporate bond's coupon rate is the annual coupon payment divided by
the bond's face value.
