Contrast Essay

Contrast Essay

1. Barry’s Steroids Company has $1,000 par value bonds outstanding at 14 percent interest. The bonds will mature in 30 years. If the percent yield to maturity is 12 percent, what percent of the total bond value does the repayment of principal represent? 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. Input your answer as a percent rounded to 2 decimal places.)

What is principle of a percentage of bond price?  

 

Refer to Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) decline from 9 percent to 8 percent.    a. What is the bond price at 9 percent?

b. What is the bond price at 8 percent?   

c. What would be your percentage return on investment if you bought when rates were 9 percent and sold when rates were 8 percent? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)   

Return on profit? % and loss/profit

 

2 Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 30-year life when issued and the annual interest payment was then 13 percent. This return was in line with the required returns by bondholders at that point as described below:

Real rate of return 3 %
Inflation premium 5
Risk premium 5
Total return 13 %
 

 

3. Assume that five years later the inflation premium is only 3 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 25 years remaining until maturity.    Compute the new price 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.)   

New price of the bond?

4. Katie Pairy Fruits Inc. has a $1,100, 12-year bond outstanding with a nominal yield of 16 percent (coupon equals 16% × $1,100 = $176 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. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)   

b. Find the present value of 4 percent × $1,100 (or $44) for 12 years at 12 percent. The $44 is assumed to be an annual payment. Add this value to $1,100. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)   

5. 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 pays 6 percent annual interest and has 15 years remaining to maturity. The current yield to maturity on similar bonds is 11 percent.    a. What is the current price of the bonds? 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.)   

b. By what percent will the price of the bonds increase between now and maturity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)   

6. You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 13 percent, which is paid semiannually. The yield to maturity on the bonds is 8 percent annual interest. There are 10 years to maturity. 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 price of the bonds based on semiannual analysis. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)   

b. With 5 years to maturity, if yield to maturity goes down substantially to 6 percent, what will be the new price of the bonds? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)   

7. BioScience Inc. will pay a common stock dividend of $5.20 at the end of the year (D1). The required return on common stock (Ke) is 14 percent. The firm has a constant growth rate (g) of 7 percent.   Compute the current price of the stock (P0). (Do not round intermediate calculations. Round your answer to 2 decimal places.)   

8. Ecology Labs Inc. will pay a dividend of $7.20 per share in the next 12 months (D1). The required rate of return (Ke) is 20 percent and the constant growth rate is 8 percent. (Each question is independent of the others.)      a. Compute the price of Ecology Labs’ common stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)   

b. Assume Ke, the required rate of return, goes up to 25 percent. What will be the new price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)   

c. Assume the growth rate (g) goes up to 11 percent. What will be the new price? Ke goes back to its original value of 20 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places.)   d. Assume D1 is $7.90. What will be the new price? Assume Ke is at its original value of 20 percent and g goes back to its original value of 8 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places.) 

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