Question

A)

A bond offers a coupon rate of 12%, paid annually, and has a maturity of 16 years. The current market yield is 14%. Face value is $1,000. If market conditions remain unchanged, what should be the Capital Gains Yield of the bond?

B)

You own a bond with the following features: face value of $1000, coupon rate of 5% (semiannual compounding), and 15 years to maturity. The bond has a current price of $1,115. The bond is callable after 5 years with the call price of $1,050 (i.e.: the call premium is $50). What is the yield to call if the bond is called at 5 years (state as an APR)?

C)

Why do firms borrow capital?

Group of answer choices

Maintain current plant & equipment

Add to plant & equipment to exploit a favorable economic environment.

Both maintain current plant & equipment and add to plant & equipment to exploit a favorable economic environment.

To increase tax payments.

None of these reasons are valid.

Answer 1

A)

first we have to calculate the value of the bond

given number of periods = 16

YTM = 14%

coupon = 1000*12% = 120

bond value can be calculated using financial calulator

[N = 16 ; I/Y = 14% ; PMT = 120 ; FV = 1000] compute for Present value (PV)

PV = $874.70

current yield = coupon / price

= 120 / 874.70

= 13.72%

Capital gains yield = YTM - current yield

= 14% - 13.72%

= 0.28%

B)

given:

PV (current price) = $1,115

FV (future value) = $1050

N (number of periods) = 5*2 = 10 (semiannual)

Coupon = 1000*5% / 2 = 25

[N = 10 ; PV = -1115 ; PMT = 25 ; FV = 1050 ]

compute for I/Y = 1.70%

the above is semi annual rate

annual YTC = 3.40% (1.70*2) rounded to two decimals.

C)

firms borrow capital for various needs.for maintaining current plant and equipment also Add to plant & equipment to exploit a favorable economic environment.

so answer is third option

Both maintain current plant & equipment and add to plant & equipment to exploit a favorable economic environment.