Question

1. Suppose there are two bonds for sale; Bond A with 7-years to maturity, paying a semi-annual interest payment of $57.75, and available for purchase at $1,017.63; and a second bond for sale at $989.54, maturing in 5-years, and paying $63.65 on a semi-annual basis. What is the YTM of the two bonds? And which one will you add to your portfolio based on the highest yield to maturity?

2. Given the following cashflows, calculate both the NPV and the IRR for a project with a 7% cost of capital.

Initial Outlay = $100,000

Year 1 = $50,000

Year 2 = $40,000

Year 3 = $30,000

Year 4 = $10,000

Answer 1

	Ans 1
		We have to use financial calculator to solve this
		put in calculator for each individual case
					Bond A			Bond B
		FV			1000			1000
		PV			-1,017.63			-989.54
		PMT			57.75			63.65
		N		7*2	14		5*2	10
		Compute I			5.59%			6.51%
		YTM = I computed above *2			11.18%			13.02%
		Ans =
		Bond A			11.18%
		Bond B			13.02%
	Ans 2
		Computation of NPV
		Year	Cash flow	PVIF @ 7%	present value
		0	-100000	1.0000	(100,000.00)
		1	50000	0.9346	46,728.97
		2	40000	0.8734	34,937.55
		3	30000	0.8163	24,488.94
		4	10000	0.7629	7,628.95
					13,784.41
		Computation of IRR
		Year	Cash flow
		0	-100000
		1	50000
		2	40000
		3	30000
		4	10000
		IRR =	14.49%