Question
In: Finance
Rottweiler Corporation issued 100, $1,000 par value bonds on February 24, 2019. The original bonds' maturity...
Rottweiler Corporation issued 100, $1,000 par value bonds on February 24, 2019. The original bonds' maturity was 20 years, and they have a six percent coupon. Rottweiler used the money to purchase 150 Really Adorable Puppies. The firm hopes to double production of Really Adorable Puppies in the next five to ten years. The company makes all payments on a semiannual basis.
1. What is the value of the bond on February 24, 2020, if the interest rate on comparable debt is 6 percent? What is the current yield? What is the yield to maturity?
2. What is the value of the bond on February 24, 2020, if the interest on comparable debt is 10 percent? What is the current yield? What is the yield to maturity?
3. What is the value of the bond on February 24, 2020, if the interest on comparable debt is 4 percent? What is the current yield? What is the yield to maturity?
4. Draw the time path of value graph (be sure to label all points of interest) of a 6 percent coupon, $1,000 par value bond when interest rates are 4 percent, 6 percent, and 10 percent.
Solutions
Expert Solution
| 1- | |||
| Price of Bond | (coupon payment*PVAF At 3% for 38 months)+(face value*PVF at 3% at 38 months | (30*22.49246)+(1000*.32523) | 1000.00 |
| PVAF At 3% for 38 period | 1-(1+r)^-n /r =1-(1.03)^-38 /3% | 22.49246 | |
| PVF at 3% at 38 period | 1/(1+r)^n =1/(1.03)^38 | 0.32523 | |
| Current yield =Interest payment/market price | 60/1000 | 6% | |
| YTM | 6% | ||
| 2- | |||
| Price of Bond | (coupon payment*PVAF At 5% for 38 months)+(face value*PVF at 5% at 38 period | (30*16.86789)+(1000*0.15661) | 662.65 |
| PVAF At 5% for 38 period | 1-(1+r)^-n /r =1-(1.05)^-38 /5% | 16.86789 | |
| PVF at 5% at 38 period | 1/(1+r)^n =1/(1.05)^38 | 0.15661 | |
| Current yield =Interest payment/market price | 60/662.65 | 9.05% | |
| YTM | 10% | ||
| Price of Bond | (coupon payment*PVAF At 2% for 38 months)+(face value*PVF at 2% at 38 period | (30*16.86789)+(1000*0.47119) | 977.23 |
| PVAF At 2% for 38 period | 1-(1+r)^-n /r =1-(1.02)^-38 /5% | 16.86789 | |
| PVF at 2% at 38 period | 1/(1+r)^n =1/(1.02)^38 | 0.47119 | |
| Current yield =Interest payment/market price | 60/977.23 | 6.14% | |
| YTM | 4% | ||
| YTM | value of bond | ||
| 4% | 977.23 | ||
| 6% | 1000.00 | ||
| 10% | 662.65 |
jeff jeffy answered 2 years agoRelated Solutions
Rottweiler Corporation issued 100, $1,000 par value bonds on February 24, 2019. The original bonds' maturity...
Rottweiler Corporation issued 100, $1,000 par value bonds on
February 24, 2019. The original bonds' maturity was 20 years, and
they have a six percent coupon. Rottweiler used the money to
purchase 150 Really Adorable Puppies. The firm hopes to double
production of Really Adorable Puppies in the next five to ten
years. The company makes all payments on a semiannual basis.
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