Question

In: Finance

Dominique LeBlanc is the owner of a new ten-year $50,000 8% par-value bond with a Bermuda...

Dominique LeBlanc is the owner of a new ten-year $50,000 8% par-value bond with a Bermuda option and annual coupons. Allowable call dates are at the ends of years 6through 10, and the call premium at the end of year n is $300(10-n). Dominique purchased the bond for $51,975.00.

A) Find the lowest yield that Dominique may receive during the period she holds the bond.

B) Find the highest yield that Dominique may receive during the period she holds the bond.

C) Upon receipt, Dominique deposits each coupon and the redemption amount in an ac-count earning 6%. Find the lowest yield that Dominique may receive during the ten-year period.

D) Upon receipt, Dominique deposits each coupon and the redemption amount in an ac-count earning 6%. Find the highest yield that Dominique may receive during the ten-year period.

Solutions

Expert Solution

n A=300*(10-n) Fv=50000+A
Year Call Premium Amount of Receipt after n Years
6 1200 $51,200
7 900 $50,900
8 600 $50,600
9 300 $50,300
10 0 $50,000
n Year 6 7 8 9 10
Nper Number of Years 6 7 8 9 10
Pmt Annual Coupon Payment =50000*8% $4,000 $4,000 $4,000 $4,000 $4,000
Pv Purchase Price $51,975 $51,975 $51,975 $51,975 $51,975
Fv Terminal receipt at end of n years $51,200 $50,900 $50,600 $50,300 $50,000
RATE Yield 7.49% 7.46% 7.44% 7.43% 7.43%
(Using RATE function of excel)
A LOWEST YIELD 7.43%
Holding Period=10 Years
B HIGHEST YIELD 7.49%
Holding Period=6 Years
C Future Value(FV) at end of 10 years
(Cash Flow)*((1+i)^(10-n))
i=interest rate, n=year of cash flow
Interest rate =i=6%=0.06 n A FV=A*(1.06^(10-n) B FV=B*(1.06^(6-n)
Year Cash Flow Future Value Cash Flow Future Value
1 $4,000 $6,758 $4,000 $5,353
2 $4,000 $6,375 $4,000 $5,050
3 $4,000 $6,015 $4,000 $4,764
4 $4,000 $5,674 $4,000 $4,494
5 $4,000 $5,353 $4,000 $4,240
6 $4,000 $5,050 $55,200 $55,200
7 $4,000 $4,764 SUM $79,101
8 $4,000 $4,494
9 $4,000 $4,240
10 $54,000 $54,000
SUM $102,723
Yield =R for 10 years
51975*(1+R)^10=102723
(1+R)^10=102723/51975                1.98
1+R=1.98^(1/10)=                1.07
Yield =R= 7.05%
Yield =R1 for 6 years
51975*(1+R)^10=79101*(1.06^4) $99,864
(1+R1)^10=99864/51975                1.92
1+R1=1.92^(1/10)=                1.07
Yield =R= 6.75%

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