Question Five You purchase a $1,000 bond maturing in 10 years, and pay $1,150 for the...

Question Five

You purchase a $1,000 bond maturing in 10 years, and pay $1,150 for the bond. The bond pays annual interest at 5%. What is the current yield? What is the yield to maturity?

Using the information in b, you sell the bond for $1,250 at the end of year 2, what is the rate of return of the bond? Assume the payments are reinvested at a rate of 3%

Rate of return = Int + Capital Gain / Purchase Price

What is the market rate of interest on a 6%, $1,000 bond, 7 years, priced at $1,175?

Question Six

You are in a position where you decide to invest in bonds in the market place. You are considering investing in the bonds of Able Corp. Able Corp. bonds have a par value of $1,000 each and pay annual interest of 7% and mature in 25 years. Interest is paid semiannually.

The current annual rate of interest on bonds of similar risk in the market place is 8% annually. This is also your required rate of return. What price should you pay for the bond?

Now assume that the market rate of annual interest and your required rate of return is 6%. What price should you pay for the bond?

Describe two possible reasons that the market rates of a similar risk bond are different from the contractual rate of interest on the bond.

Question Seven

Musical Corporation, having recently issued a $10 million, ten-year bond issue is committed to make annual sinking fund deposits of $600,000. The deposits are made on the last day of each year and yield a return of 10% annually.

Will the sinking fund at the end of ten years by sufficient to retire the bonds? If not, what will be the deficiency?

Expert Solution

jeff jeffy answered 1 year ago

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