Question

10. A $2 million jumbo CD is paying a quoted 3.55% interest rate on 6-month maturity CDs. If after the CD is issued, the market rate on the CD falls to 3.2%. What is the secondary market price of the CD? A) $1,972,384 B) $1,019,192 C) $2,006,783 D) $2.006,896 E) $2,003,445 11. Hilton Hotels Corp. has a convertible bond issue outstanding. Each bond, with a face value of $1,000, can be converted into common shares at a rate of 61.2978 shares of stock per $1,000 face value bond (the conversion rate), or $16.3138 per share. Hilton's common stock is trading con the NYSE) at $15 per share and the bonds are trading at $1.075. Calculate the conversion value of each bond. A) $244.7 B) $1,050 C) $1,075 D) $919.5 E) None of the above 12. Suppose that $10 million face value commercial paper with a 270 day maturity is selling for $9.35 million. What is the bond equivalent yield on the paper? A1 2080

Answer 1

Solution to QUESTION-10

Future Value of the CD at 3.55% interest rate on 6-months maturity

Current market value of the CD at 3.55% interest rate on 6-months maturity = Principal x (1 + r)

= $2,000,000 x [1 + (0.0355/2)]

= $2,000,000 x [1 + 0.01775]

= $2,000,000 x 1.01775]

= $2,035,500

The Secondary price of the CD if the interest rate on CD falls to 3.20%

The Secondary price of the CD = Future Value / (1 + r)

= $2,035,500 / [1 + (0.0320/2)]

= $2,035,500 / [1 + 0.0160]

= $2,035,500 / 1.0160

= $2,003,445

“Hence, the Secondary price of the CD will be $2,003,445”