Question

6. A $10,000, 6% bond with semi-annual coupons is redeemable at par. What is the purchase price to yield 7.5% compounded semi-annually (a) nine years before maturity? (b) fifteen years before maturity? (a) The purchase price is $ (Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as needed.) (b) The purchase price is $ (Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as needed.) 7. Project A requires an immediate investment of $8000 and another $6000 in three years. Net returns are $4000 after two years, $12,000 after four years, and $8000 after six years. Project B requires an immediate investment of $4000, another $6000 after two years, and $4000 after four years. Net returns are $3400 per year for seven years. Determine the net present value at 10%. Which project is preferable according to the net present value criterion? The net present value of Project A is $ (Round to the nearest dollar as needed.) The net present value of Project B is $ (Round to the nearest dollar as needed.) According to the net present value criterion, project (1) is preferable. (1) A Scr The B On

Answer 1

6.Bond price= PVIFA x Interest + PVIF x Principal amount

A. Nine years before maturity

Coupon rate annual = 6%. So coupon rate semi annually= 6%/2= 3%

Bond interest = 300

t= 9 x 2= 18

Bond price = 300 x 9.706 + .272 x 10000= 5631.8

B. Fifteen years before maturity

t= 15 x 2= 30

Bond price = 300 x 11.81 + .114 x 10000= 4680

2. Project A

PV of cash outflow = 8000+ .751 x 6000= 12507

PV of cash inflow= .826 x 4000 + .683 x 12000+ .564 x 8000= 16018

NPV= 16018-12507 = 3511

project B

PV of cash outflow= 4000 + .826 x 6000 + .683 x 4000= 11691

PV of cash inflow= 4.8 x 3400= 16553

NPV = 16553-11691 =4862

According to PV criterion, Project B is preferable