The Black Hills Corporation issued a new series of bonds on January 1, 1990. The bonds...

The Black Hills Corporation issued a new series of bonds on January 1, 1990. The bonds were sold at par ($1,000), had a 12% coupon, and matured in 30 years on December 31, 2019. Coupon payments are made semiannually (on June 30 and December 31). (8 points)

a. What was the YTM on the date the bonds were issued?

b. What was the price of the bonds on January 1, 1995 (5 years later), assuming that interest rates had fallen to 10%.

c. Find the current yield, capital gains yield, and total yield on January 1, 1995, given the price as determined in part b.

d. On July 1, 2013 (6.5 years before maturity), Black Hills’ bonds sold for $916.42. What are the YTM, the current yield, and the capital gains yield for that date?

Solutions

Expert Solution

Answer:

The bond is sold at par which is $1,000. So, the YTM will be equal to the coupon rate of 12%. If the coupon rate and yield to maturity is same, then the bond price will be $1,000 or will trade at face value of bond.

Hence, the YTM of the bond is 12%.

b. Determination of price of bond:

Hence, the price of bond is $1,182.56.

c. Determination of current yield, capital gains yield and total yield:

Hence, the current yield is 10.15%, capital gains yield is -0.15% and total yield is 10%.

d. Determination of YTM, current yield, capital gains yield and total yield:

Hence, the YTM is 14%, current yield is 13.09%, capital gains yield is 0.91% and total yield is 14%.

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

The Pennington Corporation issued a new series of bonds on January 1, 1990. The bonds were...

The Pennington Corporation issued a new series of bonds on January 1, 1990. The bonds were sold at a price of $1050 (the par value being $1000), had a 12% coupon, and the original maturity period of 25 years (i.e., maturity date = December 31, 2014). Coupon payments are made quarterly on March 31, June 30, September 30, and December 31, respectively. What would be the price of the bond on January 1, 2000, 10 years later, assuming that the...

The Pennington Corporation issued a new series of bonds on January 1, 1987. The bonds were...

The Pennington Corporation issued a new series of bonds on January 1, 1987. The bonds were sold at par ($1,000); had a 12% coupon; and mature in 30 years, on December 31, 2016. Coupon payments are made semiannually (on June 30 and December 31). a. What was the YTM on January 1, 1987? b. What was the price of the bonds on January 1, 1992, 5 years later, assuming that interest rates had fallen to 10%? c. Find the current...

(a) Malcolm Technology issued a new series of bonds on January 1, 1985. They were sold...

(a) Malcolm Technology issued a new series of bonds on January 1, 1985. They were sold at par ($1,000), have a coupon rate of 10% and mature in 20 years. Coupon payments are made semi-annually. (i) Interest rates had risen to 12% by 1995. What would the price of the bond be on December 31, 1995? (ii) On July 1, 1995, the bond's price was $990. What was its yield to maturity on that date? (b) Malcolm Company’s bonds have...

On January 1, 2020, Oriole Corporation issued a series of 100 convertible bonds, maturing in 5...

On January 1, 2020, Oriole Corporation issued a series of 100 convertible bonds, maturing in 5 years. The face amount of each bond was $500. Oriole received $51,300 for the bond issue. The bonds paid interest every December 31 at 8%; the market interest rate for bonds with a comparable level of risk was 7.80%. The bonds were convertible to common shares at a rate of 10 common shares per bond. Oriole amortized bond premiums and discounts using the effective...

On January 1, 2020, Kingbird Corporation issued a series of 500 convertible bonds, maturing in five...

On January 1, 2020, Kingbird Corporation issued a series of 500 convertible bonds, maturing in five years. The face amount of each bond was $1,000. Kingbird received $535,000 for the bond issue. The bonds paid interest every December 31 at 5%; the market interest rate for bonds with a comparable level of risk was 4%. The bonds were convertible to common shares at a rate of ten common shares per bond. Kingbird amortized bond premiums and discounts using the effective...

On January 1, Year 1, Gibson Corporation purchased bonds issued by Williamson Company. These bonds were...

On January 1, Year 1, Gibson Corporation purchased bonds issued by Williamson Company. These bonds were classified as held-to-maturity securities. The face value of these bonds is $200,000, pay 8% interest, and were purchased to yield 6%. The bonds mature in 10 years and pay interest on an annual basis. If Gibson Corporation paid $229,440 for these bonds, how much interest revenue should it report on the bonds at December 31, Year 1? Assume that Gibson used the effective interest...

Rama Corporation issued $600,000 of 8% term bonds on January 1, 2017, due on January 1,...

Rama Corporation issued $600,000 of 8% term bonds on January 1, 2017, due on January 1, 2022, with interest payable each July 1 and January 1. Investors require an effective-interest rate of 10%. Prepare the journal entry at the date of the bond issuance (show the calculation)? Prepare a schedule of interest expense and bond amortization from 1/1/2017 to 1/1/2020? Prepare the journal entry to record the interest payment and the amortization for July 1, 2018. Prepare the journal entry...

Chowan Corporation issued $115,000 of 9% bonds dated January 1, 2016, for $111,283.65 on January 1,...

Chowan Corporation issued $115,000 of 9% bonds dated January 1, 2016, for $111,283.65 on January 1, 2016. The bonds are due December 31, 2019, were issued to yield 10%, and pay interest semiannually on June 30 and December 31. Chowan uses the effective interest method of amortization. Required: Prepare the journal entries to record the issue of the bonds on January 1, 2016, and the interest payments on June 30, 2016, December 31, 2016, and June 30, 2017. In addition,...

On January 1, 2020, Caliber Corporation issued 9% bonds dated January 1, 2020, with a face...

On January 1, 2020, Caliber Corporation issued 9% bonds dated January 1, 2020, with a face amount of $10 million. The bonds mature in 2029 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid annually on December 31. 1. What is the amount of the annual interest payment? 2. What is the price of the bond on the issue date? (state method used) 3. Was the bond sold at a discount or...

SWH Corporation issued bonds on January 1, 2018. The bonds had a coupon rate of 4.5%,...

SWH Corporation issued bonds on January 1, 2018. The bonds had a coupon rate of 4.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2028. What is the intrinsic value (to the nearest dollar) of an SWH Corporation bond on January 1, 2022 to an investor with a required return of 6%

Subjects