04 Jun Question Bond value (LO2)Cox Media Corporation pays an 11 percent coupon rate on debentures that are due in 20 years. The current yield to maturity on bon
Question
Bond value (LO2)Cox Media Corporation pays an 11 percent coupon rate on debentures that are due in 20 years. The current yield to maturity on bonds of similar risk is 8 percent. The bonds are currently callable at $1,060. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds.
Bond value (LO2)The Florida Investment Fund buys 90 bonds of the Gator Corporation through a broker. The bonds pay 8 percent annual interest. The yield to maturity (market rate of interest) is 10 percent. The bonds have a 25-year maturity.
Using an assumption of semiannual interest payments:
a. Compute the price of a bond (refer to “Semiannual interest and bond prices” in Chapter 10 for review if necessary).
b. Compute the total value of the 90 bonds.
Bond yields (LO2)An investor must choose between two bonds:
Bond A pays $80 annual interest and has a market value of $800. It has 10 years to maturity.
Bond B pays $85 annual interest and has a market value of $900. It has two years to maturity.
a. Compute the current yield on both bonds.
b. Which bond should he select based on your answer to part a?
c. A drawback of current yield is that it does not consider the total life of the bond. For example, the approximate yield to maturity on Bond A is 11.36 percent. What is the approximate yield to maturity on Bond B?
d. Has your answer changed between parts b and c of this question in terms of which bond to select?
Bond yields (LO2)An investor must choose between two bonds:
Bond A pays $92 annual interest and has a market value of $875. It has 10 years to maturity. Bond B pays $82 annual interest and has a market value of $900. It has two years to maturity.
a. Compute the current yield on both bonds.
b. Which bond should she select based on your answer to part a?
c. A drawback of current yield is that it does not consider the total life of the bond. For example, the approximate yield to maturity on Bond A is 11.30 percent. What is the approximate yield to maturity on Bond B?
d. Has your answer changed between parts b and c of this question in terms of which bond to select?
Secured vs. unsecured dept (LO1)Match the yield to maturity in column 2 with the security provisions (or lack thereof) in column 1. Higher returns tend to go with greater risk.
(1)
(2)
a. Debenture…………………………
a. 7.79%
b. Secured debt……………………..
b. 9.17%
c. Subordinated debenture……..
c. 8.67%
Bond yields (LO2)Garland Corporation has a bond outstanding with a $90 annual interest payment, a market price of $820, and a maturity date in five years. Find the following:
a. The coupon rate.
b. Thecurrent rate.
c. The approximate yield to maturity.
a. Find the theoretical market value of the bonds using semiannual analysis.
b. Do you think the bonds will sell for the price you arrived at in part a? Why?
Bond yields (LO2)Preston Corporation has a bond outstanding with a $110 annual interest payment, a market price of $1,200, and a maturity date in 10 years.
Find the following:
a. The coupon rate.
b. The current rate.
c. The approximate yield to maturity.
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