Question

1- Jim Busby calls his broker to inquire about purchasing a bond of Disk Storage Systems. His broker quotes a price of $1,100. Jim is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 14 percent interest, and it has 18 years remaining until maturity. The current yield to maturity on similar bonds is 12 percent.

a. Calculate the present value of the bond. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

2- Mark Ventura has just purchased an annuity to begin payment two years from today. The annuity is for $17,000 per year and is designed to last 10 years.

If the interest rate for this problem calculation is 12 percent, what is the most he should have paid for the annuity? Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.

3- Jack Hammer invests in a stock that will pay dividends of $3.11 at the end of the first year; $3.52 at the end of the second year; and $3.93 at the end of the third year. Also, he believes that at the end of the third year he will be able to sell the stock for $61.

What is the present value of all future benefits if a discount rate of 11 percent is applied? Use Appendix B for an approximate answer, but calculate your final answer using the formula and financial calculator methods.

4-Mrs. Crawford will receive $9,000 a year for the next 20 years from her trust. Use Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.

If a 11 percent interest rate is applied, what is the current value of the future payments?

5- If you owe $41,000 payable at the end of four years, what amount should your creditor accept in payment immediately if she could earn 9 percent on her money? Use Appendix B for an approximate answer, but calculate your final answer using the formula and financial calculator methods.

6- Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 20-year life when issued and the annual interest payment was then 13 percent. This return was in line with the required returns by bondholders at that point as described below:

   Real rate of return3%Inflation premium5 Risk premium5 Total return13%

Assume that five years later the inflation premium is only 2 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 15 years remaining until maturity.

Compute the new price of the bond. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Answer 1

Answer 1

Face value = $ 1000

Yield to maturity(i) = 12%

Coupon rate = 14%

Coupon Amount = 1000*9%= $140

Years to maturity (n)= 18

Bond price formula = Coupon amount * (1 - (1/(1+i)^n)/i + face value/(1+i)^n

=140*(1-(1/((1+0.12)^18)))/0.12 + 1000/(1+0.12)^18

1144.993402

Present Value of bond is $1144.99, while his broker quotes $1100. So bond is not overpriced, it is underpriced. So Bond should be bought.

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