Financial Management

e. If we evaluated at the same effective rate, the earlier payments would give the semiannual bond the higher value.

A bond with an annual coupon of $70 and originally sold at par for $1,000. The current market interest rate (yield to maturity) is 8%. This bond will sell at _______. Assuming no change in market interest rates, the bond will present the holder with capital ________ as it matures.

3. A 2 – year Treasury security currently earns 5.13%. Over the next 2 years, the real

a) Assuming the opportunity interest rate is 6%, what is the present value of the second alternative?

14. Global Enterprises has just signed a $3 million contract. The contract calls for a payment of $.5 million today, $.9 million one year from today, and $1.6 million two years from today. What is this contract really worth if Global Enterprises can earn 12 percent on its money?

Ellesmere also has a bond issue outstanding, which is maturing in 25 years, has a face value of

a. What would Mrs. Beach have to deposit if she were to use high quality corporate bonds an earned an average rate of return of 7%.

These bonds are short-term, only 12 months until maturity and pay 12% annually. I haven’t seen all the details on them, but this really might be a good way to increase you’re your total income and at the same time avoid the interest rate risk of intermediate-term and long-term bonds.”

The Risk Free Rate of a 30-year Treasury Bond is given as 8.95%. Also given is the Market Risk Premium of 7.43% and a firm wide equity beta of 1.43. The tax rate is assumed to be 44.1%, the same as 1987’s 175.9M tax paid from 398.9M EIBT.

"a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what

The bonds have 20 years to maturity, pay interest at 9.3%, have a par value of $1,000 and are currently selling for $890.

2. The discount rate for this bond would be 0.70%. I started with an appropriate discount rate to derive my bond purchase price, since I would not purchase a bond without finding out ahead of time what a good price should be.

Through this method, we obtained theoretical yields of the 4.25% coupon bond and 10.625% coupon bond to be 2.899% and 2.639% respectively. The corresponding theoretical prices of the bonds are $108.27 for the 4.25% coupon bond and $149.31 for the 10.625% coupon bond (see Table 1 above).

All else equal, which bond’s price is more effected by a change in interest rates, a bond with a large coupon or a small coupon? Why?

3. A european corporation has issued bonds with a par value of Sfr 1,000 and an annual coupon of 5 percent. The last coupon on these bonds was paid four months ago, and their current clean price is 90 percent.