Question

10.       How much would you pay for a corporate bond that pays an annual coupon of 15% and matures in 14 years if your required rate of return is 12%?

11.       Assuming you purchased a convertible bond at par.  If the 6% annual bond is convertible into 50 shares of stock, at what point does this option become attractive?

12.       What is the issue price of a zero coupon bond that matures at par in ten years and pays a 9% annual coupon?

13.       Using the information in question 12, what are the first two implied coupon payments on the bond?         

14.       If the corporation that issued the bond in question 12 is in a 40% tax bracket, what is their effective tax shield on the first two coupon payments?

Answer 1

10) If Annual Coupon Pmt Nper payment Number of periods Present value Face value Nper Pmt Rate $ (1000*0.15) 14 150.00 0.12 1,000.00 $ (-PV(rate,nper,pmt, fv)) (-PV(0.12,14,150, 1000)) $ 1,198.85 Current price of the bond $ 1,198.85