Assume all bonds pay interest semiannually.1. The Altoona Company issued a 25-year bond 5 years ago...

Assume all bonds pay interest semiannually.1. The Altoona Company issued a 25-year bond 5 years ago with a face value of $1,000. The bond pays interest semiannually at a 10% annual rate.

a. What is the bond's price today if the interest rate on comparable new issues is 12%?

b. What is the price today if the interest rate is 8%?

c. Explain the results of parts a and b in terms of opportunities available to investors.

d. What is the price today if the interest rate is 10%?

e. Comment on the answer to part d.

Expert Solution

1.
=PV(12%/2,2*20,-10%*1000/2,-1000)=849.537031284751

2.
=PV(8%/2,2*20,-10%*1000/2,-1000)=1197.92773883426

3.
Higher return means lower price

4.
=PV(10%/2,2*20,-10%*1000/2,-1000)=1000

5.
When coupon rate is equal to required return, the bond trades at par

jeff jeffy answered 2 years ago

GM issued a $ 1,000, 30-year bond 5 years ago at 9 % interest. Comparable bonds...

GM issued a $ 1,000, 30-year bond 5 years ago at 9 % interest. Comparable bonds yield 6 % today. What should GM’ bond sell for now? Define each variable in the equation P = (D1 + P1) / (1 + R) Solve the NPV and solve for the Payback YR Cash Flow 0 -$26,000 1 11,000 2 14,000 3 11,000 with the required rate equal to 6% 4. Use the following tax brackets for taxable income: Bracket:...

. Bright and Beautiful (B & B) Company issued a 25-year bond 5 years ago with...

. Bright and Beautiful (B & B) Company issued a 25-year bond 5 years ago with a face value of $1,000. The bond pays interest semiannually at a 10% annual rate. a. What is the bond's price today if the interest rate on comparable new issues is 12%? b. What is the price today if the interest rate is 8%? c. Explain the results of parts a and b in terms of opportunities available to investors. d. What is the...

A company issued 9%, 15-year bonds with a par value of $560,000 that pay interest semiannually....

A company issued 9%, 15-year bonds with a par value of $560,000 that pay interest semiannually. The market rate on the date of issuance was 9%. The journal entry to record each semiannual interest payment is: Multiple Choice Debit Bond Interest Expense $510,000; credit Cash $510,000. No entry is needed, since no interest is paid until the bond is due. Debit Bond Interest Expense $50,400; credit Cash $50,400. Debit Bond Interest Expense $25,200; credit Cash $25,200. Debit Bond Interest Payable...

A company issued 9%, 15-year bonds with a par value of $650,000 that pay interest semiannually....

A company issued 9%, 15-year bonds with a par value of $650,000 that pay interest semiannually. The market rate on the date of issuance was 9%. The journal entry to record each semiannual interest payment is: Multiple Choice Debit Bond Interest Expense $29,250; credit Cash $29,250. Debit Bond Interest Payable $43,333; credit Cash $43,333. Debit Bond Interest Expense $600,000; credit Cash $600,000. No entry is needed, since no interest is paid until the bond is due. Debit Bond Interest Expense...

A company issued 8%, 15-year bonds with a par value of $580,000 that pay interest semiannually....

A company issued 8%, 15-year bonds with a par value of $580,000 that pay interest semiannually. The market rate on the date of issuance was 8%. The journal entry to record each semiannual interest payment is: Multiple Choice Debit Bond Interest Expense $46,400; credit Cash $46,400. Debit Bond Interest Expense $530,000; credit Cash $530,000. Debit Bond Interest Expense $23,200; credit Cash $23,200. No entry is needed, since no interest is paid until the bond is due. Debit Bond Interest Payable...

Taylor Company issued $100,000 of 13% bonds on January 1, 2016. The bonds pay interest semiannually...

Taylor Company issued $100,000 of 13% bonds on January 1, 2016. The bonds pay interest semiannually on June 30 and December 31 and are due December 31, 2018. Required: 1. Assume the company sells the bonds for $102,458.71 to yield 12%. Prepare the journal entries to record the sale of the bonds and each 2016 semiannual interest payment and premium amortization, using the effective interest method. 2. Assume the company sells the bonds for $97,616.71 to yield 14%. Prepare the...

The Sampson Company issued a $1,000 bond 5 years ago with an initial term of 25...

The Sampson Company issued a $1,000 bond 5 years ago with an initial term of 25 years and a coupon rate of 9.5%. Today's interest rate is 10%. Do not round intermediate calculations. Round PVFA and PVF values in intermediate calculations to four decimal places. What is the bond's current price if interest is paid semiannually as it is on most bonds? Round the answer to the nearest cent. $ What is the price if the bond's interest is...

Lupe has 5% bonds outstanding that mature in six years the bonds pay interest semiannually and...

Lupe has 5% bonds outstanding that mature in six years the bonds pay interest semiannually and have a face value of $1000 currently the barns are selling for $976 the current tax rate is 21% what is the firms pretax cost of debt? A 4.97% B 5.18% C 5.47% D 6.31% E 5.80% General Disco has 8.2% semi annual coupon bonds outstanding that mature in 11 years. The yield to maturity is 7.4% what price are these bonds selling for?...

Best Buy has some bonds outstanding. These bonds pay interest semiannually, mature in 5 years, and...

Best Buy has some bonds outstanding. These bonds pay interest semiannually, mature in 5 years, and have a 8 percent coupon. The current price of the bond is $1010. What is the yield to maturity?

Meredith Company issued 13-year bonds three years ago at 5%coupon rate. The market interest rate...

Meredith Company issued 13-year bonds three years ago at 5% coupon rate. The market interest rate for the bonds is 7.5%. What is the current bond's price?a. $ 832.22 b. $ 922.07 c. $ 817.51 d. $1,005.96 e. $ 826.30

Question