Bond valuation

An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 8% annual coupon. Bond L matures in 16 years, while Bond S matures in 1 year.

Assume that only one more interest payment is to be made on Bond S at its maturity and that 16 more payments are to be made on Bond L.

1. What will the value of the Bond L be if the going interest rate is 5%? Round your answer to the nearest cent.
   $   
   
   What will the value of the Bond S be if the going interest rate is 5%? Round your answer to the nearest cent.
   $   
   
   What will the value of the Bond L be if the going interest rate is 8%? Round your answer to the nearest cent.
   $   
   
   What will the value of the Bond S be if the going interest rate is 8%? Round your answer to the nearest cent.
   $   
   
   What will the value of the Bond L be if the going interest rate is 11%? Round your answer to the nearest cent.
   $   
   
   What will the value of the Bond S be if the going interest rate is 11%? Round your answer to the nearest cent.
   $   
   
2. Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?
   
   1. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
   2. Long-term bonds have lower interest rate risk then do short-term bonds.
   3. Long-term bonds have lower reinvestment rate risk then do short-term bonds.
   4. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.
   5. Long-term bonds have greater interest rate risk then do short-term bonds.
   
   -Select-IIIIIIIVV

Identify and describe the six major building blocks of financial statement analysis. What is the initial step in applying the building blocks to analysis of financial statements? (300 words minimum)

8. Mulligan Manufacturing (MM) is a fast growing firm with expected earnings of $3 million next year. MM expects earnings to grow 10% per year indefinitely and MM’s cost of capital is 14%. MM has creative accounts, so it pays no taxes. What is the market value of MM? If MM has no debt, then what is its P/E ratio? If MM has $25 million in debt with an interest rate of 8% (cost of capital (WACC) remains 14%), what is the new P/E ratio?

8. A friend, Ms. Michelle, was renting a house for $1,000 per month, but recently purchased a

   comparable home for $200,000 plus 1% for various fees, inspections, etc. Ms. Michelle’s opportunity cost of capital is 6% per year and she will have to pay a 5% commission when she sells the house. Assuming that she has to move and sell the house in one year, how much the house appreciate in value for her to be better off than renting?

8. I just bought a $1 lottery ticket with a promised jackpot of $90 million dollars. The lottery claims that my odds of winning the jackpot are 1 in 20 million, so it seems like a good deal. The jackpot is paid in 30 equal annual installments with the first one paid today. The winnings are also taxable; my marginal tax rate is 25% and the appropriate discount rate is 5% annually. Was the lottery ticket a good investment? What is the expected value of the lottery ticket?

1. Monroe, Inc., is evaluating a project. The company uses a 13.8 percent discount rate for this project. Cost and cash flows are shown in the table. What is the NPV of the project?

Year Project

0 ($11,368,000)

1 $ 2,157,589

2 $ 3,787,552

3 $  3,200,650

4 $ 4,115,899

5 $ 4,556,424

Round to two decimal places.

2. McKenna Sports Authority is getting ready to produce a new line of gold clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $817,500, and $1,245,000 over the next three years. What is the payback period for this project? Round to four decimal places.

3.

An investment of $83 generates after-tax cash flows of $38.00 in Year 1, $66.00 in Year 2, and $127.00 in Year 3. The required rate of return is 20 percent. The net present value is

Round to two decimal places.

4. Muncy, Inc., is looking to add a new machine at a cost of $4,133,250. The company expects this equipment will lead to cash flows of $815,322, $863,275, $937,250, $1,017,112, $1,212,960, and $1,225,000 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment? Round to two decimal places.

1. A firm with a current value (cost) of $800 and will return $1,000 next year. The firm also has a potential project that costs $500 and will return $550 next year, but the firm does not have the money to invest and must raise it from outside investors. However, outside investors mistakenly believe the firm will be worth $820 in one year without the project and $13,030 with the project. For simplicity, assume a zero discount rate. Does the project have a positive NPV? Acting on behalf of existing shareholders, should you take the project?

If nominal and inflation rates were 11% and 1.5%, respectively, what was the true real return? Please show equation and work.

What does the Altman Z score tell us with respect to company financial distress? How should we use such a tool as managers? (300 words minimum)

Suppose you purchase a​ 10-year bond with 6.1 % annual coupons. You hold the bond for four​ years, and sell it immediately after receiving the fourth coupon. If the​ bond's yield to maturity was 4.7 % when you purchased and sold the​ bond,

a. What cash flows will you pay and receive from your investment in the bond per $ 100 face​ value?

b. What is the annual rate of return of your​ investment?

You are buying a house and will borrow $225,000 on a 30-year fixed rate mortgage with monthly payments to finance the purchase. Your loan officer has offered you a mortgage with an APR of 4.3 percent. Alternatively, she tells you that you can “buy down” the interest rate to 4.05 percent if you pay points up front on the loan. A point on a loan is 1 percent (one percentage point) of the loan value. How many points, at most, would you be willing to pay to buy down the interest rate?

Complex Systems has an outstanding issue of ​$1,000 par-value bonds with a  9​% coupon interest rate. The issue pays interest annually and has 16 years remaining to its maturity date.

a.  If bonds of similar risk are currently earning a rate of return of 8​%, how much should the Complex Systems bond sell for​ today?  

b.  Describe the two possible reasons why the rate on​ similar-risk bonds is below the coupon interest rate on the Complex Systems bond.

c.  If the required return were at 9​% instead of 8​%, what would the current value of Complex​ Systems' bond​ be? Contrast this finding with your findings in part a and discuss.

Assume that the Financial Management​ Corporation's ​$1000 par-value bond has a 7.400% ​coupon, matures on May​ 15, 2027, has a current price quote of 110.636 and a yield to maturity​ (YTM) of 6.934%. Given this​ information, answer the following​ questions:

a.  What was the dollar price of the​ bond?

b.  What is the ​bond's current​ yield?

c.  Is the bond selling at​ par, at a​ discount, or at a​ premium? ​ Why?

d.  Compare the​ bond's current yield calculated in part b to its YTM and explain why they differ.

Ques 1) Pension plan queries:

We decided that we need to specify the type of retirement income we want and make plans to accomplish our goal. Our goal is to plan for 25 years of retirement, at $150,000 per year, but we want to receive the

$150,000 at the beginning of each year of our retirement. So, to reach our objective, for the next 30 years, we need to set aside the right amount of money as an annual constant contribution into a retirement fund at the end of each of those years. So in total, there will be 25 annual payments (withdrawals) of 150,000 each received at the beginning of each month, preceded by 30 annual contributions made at the end of each period. (The last contribution time may correspond with that of the first withdrawal time).

We discussed this in general terms with another pension adviser, and she advised us to assume an average nominal annual rate of return of 8.50%, compounded annually, for the entire 55-year period.

Ques. How much money would we need in our pension plan when we retire after 30 years of work to make our pension dream come true? Please use (display + name) the excel function/ formula used for each yellow cell.

Ques 2) In order to accumulate this amount of money, how much would we need to deposit in our pension plan at the end of each year, for each of the next 30 years of work, if we contributed a constant amount each year? Please use (display + name) the excel function/ formula used for each yellow cell.

Ques 3) If the inflation rate for the next 30 years were to be 2% per year (assuming country’s Bank manages to meet its target inflation of about 2%), what annual income now would provide the same purchasing power as a $150,000 annual income in 30 years? Please use (display + name) the excel function/ formula used for each yellow cell.

A government decision maker is faced with making a choice among alternatives, all of which come with costs. Think of an example of such a situation and explain what the official should do.

A government official is faced with the dilemma of doing something for the public good that will have adverse consequences for himself. Think of an example of such a situation and explain what the official must do.