Paybck Method and Price of Bonds
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Problem 1) You are called in as a financial analyst to appraise the bonds of the Holtz Corporation. The $1,000 par value bonds have a quoted annual interest rate of 14 percent, which is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 15 years to maturity.
a. Compute the price of the bonds based on semiannual analysis.
b. With 12 years to maturity, if yield to maturity goes down substantially to 8 percent, what will be the new price of the bonds?
Problem 2) Assume a $40,000 investment and the following cash flows for two alternatives.
Year Investment "X" Investment "Y"
1 $6,000 $15,000
2 $8,000 $20,000
3 $9,000 $10,000
4 $17,000
5 $20,000
Which of the alternatives would you select under the payback method?
PLEASE HELP!
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Solution Summary
The solution explains how to calculate the price of a bond and the use of payback method in selecting investments
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I would like to have these problems worked out in Word format please.
Problem 1) You are called in as a financial analyst to appraise the bonds of the Holtz Corporation. The $1,000 par value bonds have a quoted annual interest rate of 14 percent, which is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 15 years to maturity.
a. Compute the price of the bonds based on semiannual analysis.
The price of the bonds is the present value of interest and principal. The interest amount is 1,000X14%/2=$70 every six months. Principal amount is $1,000. The semi annual periods till maturity are 15X2=30 and the discounting rate is YTM=12%/2=6% for semi annual. Interest amount is an annuity and so we use the PVIFA table to get the PV ...
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