Prob. 1. Default RiskA firm issued an 8% coupon bond (semiannual coupon payment) 20 years ago. Thebond now has 10 years left until its maturity date, but the firm is having financialdifficulty. Investors believe that the firm will be able to make interest ratepayments only for the first eight years. Starting in year nine, the firm will not beable to pay any coupon. In total, the firm will miss four coupon payments. Also,investors believe that the firm will be forced into bankruptcy eventually andbondholders will receive only 75% of par value.a) If the required interest rate is 11%, what is the present value of the couponpayments that the firm is able to pay? What is the present value of the parthat the firm is able to pay?b) What should the bond be selling at?c) What is the stated yield-to-maturity (YTM) of the bond?

Bond valuation entails determining the present value of a bond's future cash flows, which include…

a) If the required interest rate is 11%, what is the present value of the coupon payments that the firm is able to pay? What is the present value of the par that the firm is able to pay? b) What should the bond be selling at? c) What is the stated yield-to-maturity (YTM) of the bond?

a) If the required interest rate is 11%, what is the present value of the coupon payments that the firm is able to pay? What is the present value of the par that the firm is able to pay? b) What should the bond be selling at? c) What is the stated yield-to-maturity (YTM) of the bond?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

Prob. 1. Default Risk
A firm issued an 8% coupon bond (semiannual coupon payment) 20 years ago. The
bond now has 10 years left until its maturity date, but the firm is having financial
difficulty. Investors believe that the firm will be able to make interest rate
payments only for the first eight years. Starting in year nine, the firm will not be
able to pay any coupon. In total, the firm will miss four coupon payments. Also,
investors believe that the firm will be forced into bankruptcy eventually and
bondholders will receive only 75% of par value.
a) If the required interest rate is 11%, what is the present value of the coupon
payments that the firm is able to pay? What is the present value of the par
that the firm is able to pay?
b) What should the bond be selling at?
c) What is the stated yield-to-maturity (YTM) of the bond?

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Which of the following statements regarding bonds and their terms is FALSE? *** OA. When we calculate a bond's yield to maturity by solving the formula, Coupon Coupon Coupon + Face Price of an n-period bond = (1 + )" + + + MA (1+)¹ (1+)² the yield we compute will be a rate per coupon interval. OB. The internal rate of return (IRR) of an investment in a zero-coupon bond is the rate of return that investors will earn on their money if they buy a default - free bond at its current price and hold it to maturity. OC. The yield to maturity of a bond is the discount rate that sets the future value (FV) of the promised bond payments equal to the current market price of the bond. OD. Financial professionals also use the term spot interest rates to refer to the default - free zero- coupon yields.
1. Consider a bond market where the demand for a particular bond is given by the equatione Bd = 2360 – 0.8P< where Bd is the number of bonds demanded and P is the price of the bond. Suppose the supply of this bond is fixed at 1400. (a) Calculate the price of the bonde (b) Suppose the bond is a consol with an annual coupon of 45. What is the yield on this security?
The time value of money is used in calculating bond prices because: Group of answer choices A - The company might choose to repay the bonds prior to their maturity date B - Bond investors receive future payments and purchase bonds with current dollars C - The amount to be repaid at maturity will change as market rates change D - Cash interest payments to bondholders will change as market rates change
Check My Work eBook N Problem Walk-Through The Stewart Company has $908,500 in current assets and $354,315 in current liabilities. Its initial inventory level is $227,125, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.07 Round your answer to the nearest dollar. $
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Yield to maturity The relationship between a bond's yield to maturity and coupon interest rate can be used to predict its pricing level. For the bond listed below, state whether the price of the bond will be at a premium to par, at par, or at a discount to par. Coupon interest rate Yield to maturity 10% 8% What is the price of the bond in relation to its par value? (Select the best answer below.) O A. The bond sells at a discount to par. OB. The bond sells at par. OC. The bond sells at a premium to par.
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