Question

6. Storico Co. has two types of coupon bonds outstanding. Bond A is a 7-year 6 percent annual coupon bond with $1000 par value selling for $972.58. Bond B is a 5-year 7 percent annual coupon bond with $1000 par value. Assume that bond A and bond B have the same yield to maturity, what is the price of bond B? A. $936.91 B. $972.58 C. 1000.00 D. 1020.78 E 1042.12 7. All else equal, which of the following bond has a higher yield? A. Tax-exempt bond rather than a taxable bond B. An investment-grade bond rather than a junk bond C. Bond that can be sold quickly in the market vs. bond that can be sold slowly D. Bond with a call provision vs. bond without one E. Bond with protective covenants rather than a bond with no covenants 8. Refer to the table below for current US corporation federal tax rate. Corporation Growth has $80,100 in taxable income. The company's average federal tax rate is Taxable income Tax Rate $0 - 50.000 1996 50,000 - 75.000 25% 75.000 - 100.000 19 100.000 - 335,000 39% 335.000 - 10,000,000 10,000,000 - 15,000,000 35% | 15,000,000 -18,333,333 38% 18,333,333 + 35% A. 19.3% B. 25% C 34% D. 35% E 39% 9. Andre's Bakery has sales of $687,000 with costs of $492,000. Interest expense is $26,000 and depreciation is $42.000. Dividend paid out is $20,000. The tax rate is 35 percent. What is the net income? A. $42.750 B. $62,550 C. $82,550 D. $86,450 E $124.550 10. SDJ, Inc., has current asset of $6.000, current liabilities of $2,000, and inventory of $1.000. The quick ratio is A. 1 B. 2 925 D. 3 E. 4

Answer 1

Solution to QUESTION-6

Step-1, The Calculation of the Yield to maturity of (YTM) of the Bond-A

• The Yield to maturity of (YTM) of the Bond is the discount rate at which the Bond’s price equals to the present value of the coupon payments plus the present value of the Face Value/Par Value
• The Yield to maturity of (YTM) of the Bond is the estimated annual rate of return expected by the bondholders for the bond assuming that the they hold the Bonds until it’s maturity period/date.
• The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 6.00%]	PMT	60
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [7 Years]	N	7
Bond Price [-$972.58]	PV	-972.58

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the annual yield to maturity (YTM) on the bond = 6.50%.

“Hence, the Yield to maturity of (YTM) of the Bond-A will be 6.50%”

Step-2, The Price of the Bond-B

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 7.00%]	PMT	70
Market Interest Rate or Yield to maturity on the Bond [6.50%]	1/Y	6.50
Maturity Period/Time to Maturity [5 Years]	N	5
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,020.78.

“Hence, the Price of the Bond-B will be $1,020.78”

“Therefore, the Price of the Bond-B will be $1,020.78”