Question

In: Finance

Assume Moore Ltd. issues a 25-year zero-coupon bond with a face value of $75 million. The...

Assume Moore Ltd. issues a 25-year zero-coupon bond with a face value of $75 million.
The bond was issued to yield 6.4% per year (which equated to the market’s required rate
of return on Moore’s debt).
a. What should the market value of the bond be at the time of issue?
b. What amount will the purchaser of the bond record on its books as Investment –
Bond.
c. What will the value of that account (Investment – Bond) be at the end of the last
day of 25th year (i.e., at maturity)?
d. What best explains how that Investment – Bond account value changed over that
25-year period on the books of the investor (for simplicity sake, assume that the
original purchaser of the bond held it until its maturity)?

Solutions

Expert Solution

Solution:

Given:

We have a zero coupon bond of $75 million issued at yield of 6.4%.

a.

Market Value of the bond is the present value of the bond i.e. present value of $75 million the purchaser will receive after 25 years discountd at yield rate of 6.4%.

Market Value of bond = 75/(1+6.4%)^25 =  $15.90

b.

The purchaser will record the amount it paid for investing in the bond i.e. $15.90.

c.

At the maturity, the Investment- Bond account will equal face value of $75 million

d.

Interest at the yield rate gets added to the Investment -Bond account each year. Below computations will give you the clarity.

-x-


Related Solutions

Assume a 7-year zero coupon bond with $1000 face value with a yield of 7% (continuously...
Assume a 7-year zero coupon bond with $1000 face value with a yield of 7% (continuously compounding). Wherever applicable, use e = 2.71828. • What is the price of the bond? • Use the duration to calculate the effect on the bond’s price of a 0.5% decrease on its yield. • Recalculate the bond’s price on the basis of a 6.5% per annum yield and verify that your result in (b) is a good approximation of the change in the...
Assume a 10 year zero-coupon bond with a face value of $1,000.The interest rate has...
Assume a 10 year zero-coupon bond with a face value of $1,000. The interest rate has increased form 10% to 20%. What is the capital gain?
A company has a zero coupon bond issue with a face value of $1 million that...
A company has a zero coupon bond issue with a face value of $1 million that matures in one year. The assets of the firm are currently valued at $1.2 million, but this amount is expected to either decrease to $1.1 million or increase to $1.5 million in a year's time. Assume the risk-free rate is 5%. What is the value of the equity? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit any commas...
Portfolio A consists of a 2-year zero-coupon bond with a face value of $8,000 and a...
Portfolio A consists of a 2-year zero-coupon bond with a face value of $8,000 and a 10-year zero-coupon bond with a face value of $2,000. The current yield on all bonds is 11.75% per annum. (Answer with two decimal digits accuracy) The duration of portfolio A is
What is the quote of a 5 year, zero coupon bond with $1000 face value if...
What is the quote of a 5 year, zero coupon bond with $1000 face value if the yield to maturity is 2.6% (semiannual compounding)? Round to 3 decimal places
A zero-coupon bond with $1000 face value has 10-year to maturity. If this bond is currently...
A zero-coupon bond with $1000 face value has 10-year to maturity. If this bond is currently trading at $463.20. What is this bond’s YTM (i.e., required rate of return)? What is the coupon rate for a bond with three years until maturity, a price of $953.46, and a yield to maturity of 6%? Assume the bond’s face value is $1,000. Kodak has a bond with 10 year until maturity, a coupon rate of 10%, and selling for $1,200. This bond...
Bryce Body Works has a zero-coupon bond outstanding with a face value of $12 million that...
Bryce Body Works has a zero-coupon bond outstanding with a face value of $12 million that matures in 5 years. The market value of its assets is $14 million and the annual standard deviation of the return on the firm's assets is 46%. The risk-free rate is 5% (continuously compounded). What is the market value of the firm's equity (in $ million)? What is the value of the risky bond? What is the return on the risky bond?
Bryce Body Works has a zero coupon bond outstanding with a face value of $14 million...
Bryce Body Works has a zero coupon bond outstanding with a face value of $14 million that matures in 5 years. The market value of its assets is $17 million and the annual standard deviation of the return on the firm's assets is 27%. The risk-free rate is 1% (continuously compounded). Part 1: What is the market value of the firm's equity (in $ million)? Part 2: What is the value of the risky bond? Part 3: What is the...
"Suppose you buy a 30 year zero coupon bond with a face value of $1000 and...
"Suppose you buy a 30 year zero coupon bond with a face value of $1000 and a 4% annual interest rate, compounded semi-annually. 1 minute after you buy the bond, the interest rate on this bond falls to 3%, compounded semi-annually. What is the percent change in the bond price?
One-year zero coupon bond with a face value of $1000 is sellingat $981. What is...
One-year zero coupon bond with a face value of $1000 is selling at $981. What is the yield to maturity of this bond? State the answer as a number with 2 decimals without % sign. For example, 5.55 is a correct answer, while 5.55% or 0.055 are not correct.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT