Essentials of Corporate Finance
Essentials of Corporate Finance
8th Edition
ISBN: 9780078034756
Author: Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 13, Problem 8CTCR
Summary Introduction

To discuss: Whether bankruptcy is an ethical tactic.

Introduction:

The legal proceeding, which involves a business or person that cannot be able to pay back the outstanding debts is called a bankruptcy. There are two costs of bankruptcy. They are a direct cost of bankruptcy and indirect cost of bankruptcy.

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An insurance company has liabilities of £7 million due in 10 years' time and £9 million due in 17 years' time. The assets of the company consist of two zero-coupon bonds, one paying £X million in 7 years' time and the other paying £Y million in 20 years' time. The current interest rate is 6% per annum effective. Find the nominal value of X (i.e. the amount, IN MILLIONS, that bond X pays in 7 year's time) such that the first two conditions for Redington's theory of immunisation are satisfied. Express your answer to THREE DECIMAL PLACES.
An individual is investing in a market where spot rates and forward rates apply. In this market, if at time t=0 he agrees to invest £5.3 for two years, he will receive £7.4 at time t=2 years. Alternatively, if at time t=0 he agrees to invest £5.3 at time t=1 for either one year or two years, he will receive £7.5 or £7.3 at times t=2 and t=3, respectively. Calculate the price per £5,000 nominal that the individual should pay for a fixed-interest bond bearing annual interest of 6.6% and is redeemable after 3 years at 110%. State your answer at 2 decimal places.
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Chapter 13 Solutions

Essentials of Corporate Finance

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How Bankruptcy Works; Author: Two Cents;https://www.youtube.com/watch?v=tpI0XWjIsqI;License: Standard Youtube License