Bond Problems
Not what you're looking for?
Assume interest payments are on an annual basis for questions 2,4,6, & 10.
2. Bond Value
Midland oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is:
a. 6 Percent
b. 8 Percent
c. 13 Percent
4. Bond Value
Harrison Ford Auto Company has a $1,000 par value bond outstanding that pays 11 percent interest. The current yield to maturity on each bond in the market is 8 percent. Compute the price of these bonds for these maturity dates:
a. 30 years
b. 15 years
c. 1 year
6. Bond maturity effect: Use the following graph as and example to answer the question.
Time period in years (of Bond price with 8% yield Bond Price with 12% Yield
10% bond) to Maturity to Maturity
0 $1,000.00 $1,000.00
1 1,018.60 982.30
5 1,080.30 927.50
10 1,134.00 887.00
15 1,170.90 864.11
20 1,196.80 850.90
25 1,213.50 843.30
30 1,224.80 838.50
Problem: Kilgore Natural Gas has a $1000 par value bond outstanding that pays 9 percent annual interest. The current yield to maturity on such bonds in the market is 12 percent. Compute the price of the bonds for these maturity dates: a. 30 Years.
b. 15 Years
c. 1 Year
10. Effect of yield to maturity on bond price.
Tom Cruise Lines, Inc., Issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 12 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 4
Total return 12%
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 20 years remaining until maturity. Compute the new price of the bond.
18. Preferred stock value
The preferred stock of Ultra Corporation pays an annual dividend of $6.30. It has a required rate of return of 9 percent. Compute the price of the preferred stock.
24. Common stock value
Friedman Steel Company will pay a dividend of $1.50 per share in the next 12 months
(D1). The required rate of return (Ke) is 10 percent and the constant growth rate is 5 percent.
a. Compute Po.
(For parts b,c, and d in this problem all variables remain the same except the one specifically changed. Each question is independent of the others.)
b. Assume Ke' the required rate of return, goes up to 12 percent; what will be the new value Po?
c. Assume the growth rate (g) goes up to 7 percent; what will be the new value of
Po?
d. Assume D1 is $2, what will be the new value of Po?
Purchase this Solution
Solution Summary
The solution consists of answers to questions on 1) bond values for different maturities, yields to maturity ; 2) common stock values and 3) preferred stock values
Purchase this Solution
Free BrainMass Quizzes
Marketing Management Philosophies Quiz
A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.
Balance Sheet
The Fundamental Classified Balance Sheet. What to know to make it easy.
Income Streams
In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.
Academic Reading and Writing: Critical Thinking
Importance of Critical Thinking
Business Ethics Awareness Strategy
This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.