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Bonds and Leasing
Q1
(R company) bonds trade at 100 today. The bonds pay semiannual interest thatis paid on January 1 and july 1 . the coupon on the bond is 10 percent. How much will you pay for a )r) bond if today is
a. March 1.
b. October 1
c. July 1
d. August 15
Q2
(B company) intend to issue callable, perpetual bonds. The bonds are Callable at $1,250. One-year interest rates are 12 percent. There is a 6-percent probability that long-term interest rates are 12 percent. There is a 60% probability that long-term interest rates one year from today will be 15%. With a 40%, probability lng term interest rate will be 8%. To simplify the firms accounting (B) would like to issue the bonds at par ($1,000.). What must the coupon on the bonds be for the (B) to be able to be able to sell them at par?
Q3
The CFO of CRA is considering whether or not to refinance the two currently outstanding corporate bonds of the firm. The first one is an 8% perpetual bond with a $1000 face value with $75 million outstanding. The second one is a 9% perpetual bond with the same face value with $87.5 million outstanding . the call premiums for the two bonds are 8.5% and 9.5% of the face value , respectively. The transaction costs of the refunding are $10 million and $12 million. Respectively. The current interest rate for the two bonds are 7% and 7.25% respectively . which bond should the CFO recommend be refinanced ? what is the NPV of the refunding ?
Q4
SSE firm is considering borrowing money at 11% and purchasing a machine that costs $350,000. The machine will be depreciated over 5 years by the streightline method and will be worthless in 5 years. SSE can lease the machine with the year-end payment of $94,200. The corporate tax rate is 35%. Should SSEbuy or lease?
Q5
RRC wants to expand its manufacturing facilities. LLC has offered RRC the opportunity to lease a machine for $100,000 for 5 years. The machine will be fully6 depreciated by the straight-line method. The corp. tax rate for RRc is 25%. While LLC tax rate is 35%. The appropriate before-tax interest rate is 8%. Assume lease payments occur at year end. What is RRC reservation price? What is LLC's reservation price? What is the negotiating range of the lease?

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The solution explains various questions relating to sale of bonds with accrued interest, bond refunding decisions and calculating the reservation price in leasing decisions

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Bonds and Leasing
Q1
(R company) bonds trade at 100 today. The bonds pay semiannual interest thatis paid on January 1 and july 1 . the coupon on the bond is 10 percent. How much will you pay for a )r) bond if today is
a. March 1.
b. October 1
c. July 1
d. August 15
a. If you purchase the bond on March 1, you owe the seller two months of interest. The seller owned the bond for two months since the last interest payment date (January 1).
The interest rate on the bond is 10%. The interest per month is 0.8333% (=10% / 12). 1.6667% (= 0.8333% x 2) is the interest for two months. The interest amount is 1,000X1.6667%=16.67. The total amount to be paid is the face value + the accrued interest = 1,000+16.67 = 1,016.67
b. If you purchase the bond on October 1, you owe the seller three months of interest. The seller owned the bond for three months since the last interest payment date (July 1).
The interest rate on the bond is 10%. The interest per month is 0.8333% (= 10% / 12). 2.5% (0.8333% x 3) is the interest for three months. The interest amount is 1,000X2.5%=$25. The total amount to be paid is the face value + the accrued interest = 1,000+25 = $1,025
c. Since July 1 is an interest payment date, there is no accrued interest on the bonds. If today is July 1, you will pay 100% of the face value for the bond. If the face value of the bonds is $1,000, then you will pay $1,000.
d. If you purchase the bond on August 15, you owe the seller six weeks of interest. The seller owned the bond for six weeks since the last interest payment date (July 1). The interest rate on the bond is 10%. The interest per two week period is 0.41667% (10% / 24). 1.25% (=0.41667% x 3) is the interest six weeks. The interest amount is 1,000X1.25%=12.50. The total amount to be paid is the face value + the accrued interest = 1,000+12.50 = $1,012.50
Q2
(B company) intend to issue callable, perpetual bonds. The bonds are Callable at $1,250. One-year interest rates are 12 percent. There is a 60% probability that long-term interest ...

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