Finance Essay example

1024 Words Mar 11th, 2012 5 Pages
5.1 Jackson Corporation's bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a \$1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%. What is the market price of these bonds?

P = F*r*[1 -(1+i)^-n]/i + C*(1+i)^-n

F = par value
C = maturity value r = coupon rate per coupon payment period i = effective interest rate per coupon payment period n = number of coupon payments remaining

In this problem F = 1000. And, since we are not given the maturity value, we can assume that it is the same as the par value. Therefore, C = 1000.

r = .08 i = .09 n = 12

By Plugging the numbers into the equation: 1000*.08 * (1 - 1.09^-12)/.09 + 1000*1.09^-12 = \$928.39
The bonds mature in 8 years, have a face value of \$1,000, and a yield to maturity of 8.5%. What is the price of the bonds?

Coupon rate = 10% paid semiannually
Years to maturity = 8 years
Par value = \$1,000
YTM = 8.5%
Coupon rate = 10%/2 = 5%
Number of payments = 8*2 = 16
YTM = 8.5%/2 = 4.25%
Value of the bond=t=1nPar value*Coupon rate1+YTMt+Par value1+YTMn

Given: | ? |
Coupon rate | 10.00% | Paid semiannually |
Years to maturity | 8 | years |
Face value | \$1,000 | |
YTM | 8.50% | |
Adjustment for semiannual payment | ? |
Coupon rate | 5.00% | |
Number of coupon payments | 16 | |
YTM | 4.25% | |
| | |
Year | Coupon payment | Discount with YTM |
1 | \$50.00 | \$47.96 |
2 | \$50.00 | \$46.01 |
3 | \$50.00 | \$44.13 |
4 | \$50.00 | \$42.33 |
5 | \$50.00 | \$40.61 |
6 | \$50.00 | \$38.95 |
7 | \$50.00 | \$37.36 |
8 | \$50.00 | \$35.84 |
8 | \$1,000 | \$716.79 |
Value of the bond | | \$1,049.98 |

5-13 You just purchased a bond which matures in 5 years. The bond has a face value of \$1,000, and has an 8 percent annual coupon. The bond has a current yield of 8.21 percent. What is the bond’s yield to maturity?

Current Yield = Annual Coupon / PV

0.0821 = 80 / PV

PV = 80 / 0.0821 = 974.42

N = 5; PMT = 80; FV=1000; PV = 974.42 CPT I/Y

I/Y = 8.65%

Page 257

6-6 If a company’s beta were to double, would it expected return double?
No, if a beta were to double, its expected return would also not double.

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