Question

Applying Time Value of Money Concepts
Complete the missing information in the table below. Assume that all bonds pay interest semiannually.

Do not use negative signs with answer.
Round percentages to one decimal place (ex. 0.0345 = 3.5%).
Round all other values to the nearest whole number.

	Annual	Years to	Coupon		Issue
	Yield	Maturity	Rate	Face value	Proceeds
Firm 1	8.00%	15	7.00%	$400,000	$Answer
Firm 2	3.00%	10	0.00%	$Answer	$631,100
Firm 3	6.50%	Answer	5.00%	$500,000	$463,223
Firm 4	Answer %	12	3.50%	$1,000,000	$1,136,452
Firm 5	0.80%	20	2.00%	$600,000	$Answer

need help with this problem .... Thank You

Answer 1

As given in the above Question , interest id paid semi-annually , so remeber for it:

a) Cut the coupon rate payment into half

b) Cut yield rate into half

c) No of maturity periods should be doubled.

Also remeber the following conditions to solve above :

1) If yield Rate > Coupon rate , then Net proceeds < Face Value

2) If Yield Rate = Coupon Rate,then Net proceeds = Face Value

3) If Yield Rate< Coupon Rate,then Net proceeds >Face Value

So for:

I)Firm 1= Net Proceeds < Face Value.

using formula , PV= C(1-(1+r)^-n)/r + F/(1+r)ⁿ

^{Where PV = Net Proceeds}

^{C= Coupon Payment= (7/200)*400000=14000}

^{r= Yield rate=8/2= 4}

^{n= Maturity Period=15*2=30}

^{F= Future Value=400000}

^{Answer= 245096}

II) For Firm 2

As coupon rate is Zero , so it must be a zero coupon bond rate

Formula of Calculation: Yield to Maturity= Face Value/Net Proceeds^(1/Years of Maturity)-1

So Face Value is 1281133.

Using Formula of Firm 1, Rest can also be calculated.