**Problem 10-12 Bond Value [LO10-3]**Jim Busby calls his broker to inquire about purchasing a bond of Disk Storage Systems. His broker quotes a price of $1,190. Jim is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 13 percent interest, and it has 17 years remaining until maturity. The current yield to maturity on similar bonds is 11 percent.**a. Calculate the present value of the bond.** Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. *(Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)*- Present Value: [Text box for answer]**b. Do you think the bond is overpriced?**- [ ] No- [ ] Yes

The present value is the value of the sum received at time 0. It is the current value of the sum…

Answered: Jim Busby calls his broker to inquire…

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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You buy a 12 percent, 15-year, $1,000 par value floating rate bond in 1999. By the year 2004, rates on bonds of similar risk are up to 14 percent. What is your one best guess as to the value of the bond? Value of the bond
An insurance company is thinking about purchasing bonds A and B with zero coupons to cover some of its future liabilities. The redemption periods for these zero-coupon bonds are seven and twenty years, respectively.£11 million is due in 11 years, and £14 million is due in 16 years, according to the list of its liabilities.Determine bond B's value at an effective 5% annual interest rate so that Redington's theory of immunization's first two requirements are met. (correct answer=6.419) (using formulas, no tables)
c. The investments officer for Sillistine Savings is concerned about interest rate risk lowering the value of the institution's bonds. A check of the bond portfolio reveals an average duration of 4.5 years. How could this bond portfolio be altered in order to minimize interest rate risk within the next year?
Kevin Rogers is interested in buying a five-year bond that pays a coupon of 8.5 percent on a semiannual basis. The current market rate for similar bonds is 6.9 percent. What should be the current price of this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.) O $1,067 O $1,099 O $965 O $982
If you were to purchase a 12% bond when the market interest rate for such bonds was 11%, would you expect to pay more or less than the face amount for the bond? If you were to purchase a 12% bond when the market interest rate for such bonds was 13%, would you expect to pay more or less than the face amount for the bond? Explain your answers from above?
The Isabelle Corporation rents prom dresses in its stores across the southern United States. It has just issued a five-year, zero-coupon corporate bond at a price of $62 (assume a $100 face value bond). You have purchased this bond and intend to hold it until maturity. a. What is the yield to maturity of the bond? b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default? c. What is the expected return (expressed as an EAR) if there is a 100% probability of default and you will recover 90% of the face value? d. What is the expected return (expressed as an EAR) if the probability of default is 50% in good times, the likelihood of default is higher in bad times than good times, and, in the case of default, you will recover 90% of the face value? e. For parts (b) through (d), what can you say about the five-year, risk-free interest rate in each case? Note: Assume annual compounding. C a. What is the yield to maturity of the bond? The yield to…
Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond with semiannual payments has 5 percent annual interest and has 20 years remaining to maturity. The current yield to maturity on similar bonds is 14 percent. (Round "PV Factor" to 3 decimal places. Do not round Intermediate calculations. Round the final answers to 2 decimal places.) a. What is the current price of the bonds? Use Appendix B and Appendix D. Current price 530.78 b. By what percent will the price of the bonds increase between now and maturity? Price increases by 88.40 % c. What is the annual compound rate of growth in the value of the bonds? (Use Appendix A) Annual compound rate 4.63 %
Katie Pairy Fruits Incorporated has a $2,200 23-year bond outstanding with a nominal yield of 15 percent (coupon equals 15 % × $2,200 = $330 per year). Assume that the current market required interest rate on similar bonds is now only 12 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Compute the current price of the bond. Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual. Current price of the bond b. Find the present value of 3 percent x $2,200 (or $66) for 23 years at 12 percent. The $66 is assumed to be an annual payment. Add this value to $2,200. Note: Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual, Present value
The Chief Financial Officer of a company would like to raise money for new equipment by floating a new bond issue. The CFO would like to receive $1000 (full face value) for each of the bonds she sells. After collecting the below bond market data, and if the bonds carry a rating of A and have a term of 10 years, what coupon rate should be included in the bond contract? Assume an annual coupon payment. Security& Rating Maturity Face Coupon Price Treasury 1 $ 1,000 0.00% $ 965.00 Treasury 3 $ 1,000 1.90% $ 939.06 Treasury 5 $ 1,000 4.30% $ 932.42 Treasury 10 $ 1,000 6.80% $ 1,007.12 Treasury 15 $ 1,000 6.60% $ 908.25 CorpA A 5 $ 1,000 8.10% $ 990.00 CorpB BB 10 $ 1,000 7.90% $ 859.88 CorpC AA 15 $ 1,000 7.00% $ 660.00

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