Question

In: Accounting

Jim Busby calls his broker to inquire about purchasing a bond of Disk Storage Systems. His...

Jim Busby calls his broker to inquire about purchasing a bond of Disk Storage Systems. His broker quotes a price of $1,150. Jim is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 13 percent interest, and it has 16 years remaining until maturity. The current yield to maturity on similar bonds is 11 percent. a. Calculate the present value of the bond. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods

Solutions

Expert Solution

Yes, Bond is overpriced.

a. Present value of the bond $    1,148
Present value of the bond is the present value of cash flow from bond.
There are two cash flow from bond -a) Coupon Interest and b) Maturity Value
Present value of coupon interest $       959
Present value of Par Value $        188
Present value of bond $    1,148
Working:
a. Coupon interest = Par Value x Coupon Rate = $    1,000 x 13% = $        130
b. Maturity Value = Par Value = $    1,000
c. Cumulative discount factor = (1-(1+i)^-n)/i Where,
= (1-(1+0.11)^-16)/0.11 i = 11%
=      7.3792 n = 16
d. Discount factor for 16 years = 1.11^-16
=      0.1883
e. Present value of coupon interest = $        130 x      7.3792 = $        959
f. Present Value of Par Value = $    1,000 x      0.1883 = $        188

Related Solutions

Jim Busby calls his broker to inquire about purchasing a bond of Disk Storage Systems. His...
Jim Busby calls his broker to inquire about purchasing a bond of Disk Storage Systems. His broker quotes a price of $1,200. Jim is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 11 percent interest, and it has 20 years remaining until maturity. The current yield to maturity on similar bonds is 9 percent. a. Calculate the present value of the bond. Use Appendix Band Appendix D for an approximate...
Ron Rhodes calls his broker to inquire about purchasing a bond of Golden Years Recreation Corporation....
Ron Rhodes calls his broker to inquire about purchasing a bond of Golden Years Recreation Corporation. His broker quotes a price of $1,180. Ron is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 12 percent annual interest payable semiannually, and has 10 years remaining until maturity. The current yield to maturity on similar bonds is 10 percent.    a. Compute the new price of the bond. (Use a Financial calculator to...
Ron Rhodes calls his broker to inquire about purchasing a bond of Golden Years Recreation Corporation....
Ron Rhodes calls his broker to inquire about purchasing a bond of Golden Years Recreation Corporation. His broker quotes a price of $1,140. Ron is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 12 percent annual interest payable semiannually, and has 15 years remaining until maturity. The current yield to maturity on similar bonds is 10 percent.    a. Compute the new price of the bond. (Use a Financial calculator to...
Kiran is thinking about purchasing a birthday gift for his girlfriend. Instead of a handbag or...
Kiran is thinking about purchasing a birthday gift for his girlfriend. Instead of a handbag or jewellery, he will buy a financial asset for her. He thinks this is a wonderful gift because this asset will payout a certain annual cash flow from her 26th birthday until her 35th birthday. The cash flow will be $5,000 on her 26th birthday and this will grow at a rate of 3% each year. How much would Kiran have to pay on his...
Max is thinking about purchasing a house. He wishes his annual payments to be 25% of...
Max is thinking about purchasing a house. He wishes his annual payments to be 25% of his salary. The following table lists his expected salary over the next 30 years. How much is Max willing to borrow for his house? Assume he can find a loan that matches his desired payments. Assume the interest rate is 6.58%. Years Salary 1 -10 $37,823 11-20 $97,337 21-30 $185,750
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT