Question

In: Finance

Here are data on ​$1,000 par value bonds issued by​ Microsoft, GE​ Capital, and Morgan Stanley....

Here are data on ​$1,000 par value bonds issued by​ Microsoft, GE​ Capital, and Morgan Stanley. Assume you are thinking about buying these bonds. Answer the following​ questions:

a. Assuming interest is paid​ annually, calculate the values of the bonds if your required rates of return are as​ follows: Microsoft, 3 percent; GE​ Capital, 8 ​percent; and Morgan​ Stanley, 12 ​percent; where:

Microsoft GE Capital Morgan Stanley
Coupon interest rate 5.00 % 4.00 % 4.50 %
Years to Maturity 29 12 9

b. The bonds are selling for the following​ amounts:

Microsoft ​$1,474

GE Capital        ​$795

Morgan Stanley ​$507

What are the expected rates of return for each​ bond?

c. How would the value of the bonds change if​ (1) your required rate of return ​(rb​) increased 2 percentage points or​ (2) decreased 2 percentage​ points?

d. Explain the implications of your answers in part c in terms of interest rate​ risk, premium​ bonds, and discount bonds.

e. Should you buy the​ bonds? Explain.

Solutions

Expert Solution

d)

From the above we can derive the relation between the interest rate ,coupon and price of the bonds

when Interest rate = Coupon bond will trade at par value

When interest rate > coupon rate , bond will trade at discount

when Interest rate < coupon rate , bond will trade at premium

e)

Microsoft :

From above calculations actual price = 1383.77 but it is selling at $1474 - Over priced , do not buy

GE capital : Actual Price = $698.56 but it is selling for $795 - Over priced , Do not buy

Morgan stanley: Actual Price = Actual Price $600.38 but it is selling for $507 - under priced , Buy it

Formulas will be as follows:


Related Solutions

Here are data on ​$1,000 par value bonds issued by​ Microsoft, GE​ Capital, and Morgan Stanley....
Here are data on ​$1,000 par value bonds issued by​ Microsoft, GE​ Capital, and Morgan Stanley. Assume you are thinking about buying these bonds. Answer the following​ questions: a. Assuming interest is paid​ annually, calculate the values of the bonds if your required rates of return are as​ follows: Microsoft, 5.5 ​percent; GE​ Capital, 17.5 percent; and Morgan​ Stanley, 11.5 ​percent; where: Microsoft GE capital Morgan Stanley Interest Rate 4.50% 6.75% 8% Maturity 26 23 13 Microsoft        ​$798 GE Capital     ​$476...
Here are data on ​$1,000 par value bonds issued by​ Microsoft, GE​ Capital, and Morgan Stanley....
Here are data on ​$1,000 par value bonds issued by​ Microsoft, GE​ Capital, and Morgan Stanley. Assume you are thinking about buying these bonds. Answer the following​ questions: a. Assuming interest is paid​ annually, calculate the values of the bonds if your required rates of return are as​ follows: Microsoft, 5.5 percent; GE​ Capital, 16.5 ​percent; and Morgan​ Stanley, 12​ percent; where: MICROSOFT GE CAPITAL MORGAN STANLEY Coupon interest rate       5.25%          7.50%      8.00% Years to maturity             26                         22                       18             b....
Here are data on ​$1000 par value bonds issued by​ Microsoft, GE​ Capital, and Morgan Stanley....
Here are data on ​$1000 par value bonds issued by​ Microsoft, GE​ Capital, and Morgan Stanley. Assume you are thinking about buying these bonds. Answer the following​ questions: a. Assuming interest is paid​ annually, calculate the values of the bonds if your required rates of return are as​ follows: Microsoft, 6.5 ​percent; GE​ Capital,16.5 ​percent; and Morgan​ Stanley, 10 ​percent; where: MICROSOFT GE CAPITAL MORGAN STANLEY Coupon interest rate       5.25%          7.25​%      8.00​% Years to maturity; Microsoft 31. GE; 26 Morgan...
Bonds issued by the Tyler Food chain have a par value of $1,000, are selling for...
Bonds issued by the Tyler Food chain have a par value of $1,000, are selling for $1,210, and have 20 years remaining to maturity. Annual interest payment is 14.5 percent ($145), paid semiannually. Compute the approximate yield to maturity. (Round the final answer to 2 decimal places.) Approximate yield to maturity %
Andrus Inc. issued convertible bonds at their $1,000 par value 5 years ago The bonds currently...
Andrus Inc. issued convertible bonds at their $1,000 par value 5 years ago The bonds currently sell for $950. At any time prior to maturity on August 1, 2031, a debenture holder can exchange a bond for 25 shares of common stock. The current stock price is $30. What is the conversion price,? $33 $32 $38 $40 None of the above
1.Bonds issued by the Tyler Food chain have a par value of $1,000, are selling for...
1.Bonds issued by the Tyler Food chain have a par value of $1,000, are selling for $1,340, and have 20 years remaining to maturity. Annual interest payment is 16.5 percent ($165), paid semiannually.    Compute the approximate yield to maturity. (Use a Financial calculator to arrive at the answers. Do not round intermediate calculation. Round the final answer to 2 decimal places.) Approximate yield to maturity 2.Rick’s Department Stores has had the following pattern of earnings per share over the last...
Bonds issued by the Coleman Manufacturing Company have a par value of $1,000, which of course...
Bonds issued by the Coleman Manufacturing Company have a par value of $1,000, which of course is also the amount of principal to be paid at maturity. The bonds are currently selling for $690. They have 10 years remaining to maturity. The annual interest payment is 8 percent ($80). Compute the yield to maturity. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Rottweiler Corporation issued 100, $1,000 par value bonds on February 24, 2019. The original bonds' maturity...
Rottweiler Corporation issued 100, $1,000 par value bonds on February 24, 2019. The original bonds' maturity was 20 years, and they have a six percent coupon. Rottweiler used the money to purchase 150 Really Adorable Puppies. The firm hopes to double production of Really Adorable Puppies in the next five to ten years. The company makes all payments on a semiannual basis. 1. ​What is the value of the bond on February 24, 2020, if the interest rate on comparable...
Rottweiler Corporation issued 100, $1,000 par value bonds on February 24, 2019. The original bonds' maturity...
Rottweiler Corporation issued 100, $1,000 par value bonds on February 24, 2019. The original bonds' maturity was 20 years, and they have a six percent coupon. Rottweiler used the money to purchase 150 Really Adorable Puppies. The firm hopes to double production of Really Adorable Puppies in the next five to ten years. The company makes all payments on a semiannual basis. 1. What is the value of the bond on February 24, 2020, if the interest rate on comparable...
Choice Hotels International originally issued a 10 ⅜ bond in 1992. These $1,000 par value bonds...
Choice Hotels International originally issued a 10 ⅜ bond in 1992. These $1,000 par value bonds mature in five years. What is the value of the Choice Hotels International bond at each of the following required rates of return, assuming the investor will hold the bond to maturity? Assume the coupons are paid annually. a.8% b.10.375% c.12.5%
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT