In: Finance
Q1-2 Bonner Metals wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 8.5 percent bonds on the market that sell for $959, make semiannual payments, and mature in 16 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par
Q1-3 Bare Trees United issued 15-year bonds 2 years ago at a coupon rate of 8.5 percent. The bonds make semiannual payments. If these bonds currently sell for 98.6 percent of par value, what is the YTM?
Q1-4 Hardy Lumber has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders
Q-5 What is the correct order of the following applies to a premium bond? start from the biggest Yield to maturity ,current yield ,coupon rate.
Answer to Question 1-2:
Face Value = $1,000
Current Price = $959
Annual Coupon Rate = 8.50%
Semiannual Coupon Rate = 4.25%
Semiannual Coupon = 4.25% * $1,000
Semiannual Coupon = $42.50
Time to Maturity = 16 years
Semiannual Period to Maturity = 32
Let Semiannual YTM be i%
$959 = $42.50 * PVIFA(i%, 32) + $1,000 * PVIF(i%, 32)
Using financial calculator:
N = 32
PV = -959
PMT = 42.50
FV = 1000
I = 4.494%
Semiannual YTM = 4.494%
Annual YTM = 2 * 4.494%
Annual YTM = 8.99%
Therefore, company should set a coupon rate of 8.99% on the bonds in order to sell them at par.
Answer to Question 1-3:
Face Value = $1,000
Current Price = 98.60% * $1,000
Current Price = $986
Annual Coupon Rate = 8.50%
Semiannual Coupon Rate = 4.25%
Semiannual Coupon = 4.25% * $1,000
Semiannual Coupon = $42.50
Time to Maturity = 13 years
Semiannual Period to Maturity = 26
Let Semiannual YTM be i%
$986 = $42.50 * PVIFA(i%, 26) + $1,000 * PVIF(i%, 26)
Using financial calculator:
N = 26
PV = -986
PMT = 42.50
FV = 1000
I = 4.34%
Semiannual YTM = 4.34%
Annual YTM = 2 * 4.34%
Annual YTM = 8.68%