You have been hired to analyze the debt securities of your organization. The firm has outstanding loans and bonds. A quick review of the balance sheet shows the following:
Liability
Amount ($)
Nominal
Interest
(coupon)
Rate
Years to
Maturity
Selected Liabilities of the firm
Simple Loans
800
5%
1
Fixed-Payment Loans
5,000
12%
19
Long-term Bonds #1
500,000
10%
4
Long-term Bonds #2
1,080,000
10%
10
Liabilities Total
1,585,800
Market Price for Bond #1
930.50
Market Price for Bond #2
859.50
Face Value of Each Bond
1,000.00
Selected Current Assets of the firm
Marketable Securities:
Treasury Bills
100,000
Note: Treasury Bills have a $10,000 face value, which matures in one year. Each Treasury Bill has a cost of $9,580.00
1-How much interest would the firm pay each year on the simple-interest loan?
2-How much would you write a cheque for to pay off the loan in one year?
3-What is the monthly payment needed to pay off the fixed-payment loans?
4-What is the current yield for each bond if the current price is:
a-$930.50 for Bond #1?
b-$859.50 for Bond #2?
5-What is the expected yield to maturity for each bond?
a-Bond #1 selling for $930.50?
b-Bond #2 selling for $859.50
6-What is the rate of capital gain if both bonds sell for $900.00 in one year?
a-Bond #1 selling for $930.50 today?
b-Bond #2 selling for $859.50 today?
7-If the Yield to Maturity expected by investors changes to 11%:
a-What will be the market price of Bond #1?
b-What will be the market price for Bond #2?
c-What will be the dollar change in price for Bond #1?
d-What will be the dollar change in price for Bond #2?
e-What will be the percent change in price for Bond #1?
f-What will be the percent change in price for Bond #2?
g-Since the change in expected yield to maturity is the same, why is the amount of change different between the bonds?
8-If investors holding our 4-year bonds (Bond #1) receive interest income annually for four years, plus the face value of the bonds at maturity,
a-What will be the total interest earned on the bond over the next four years?
b-What will be the face value received at maturity?
Given the following projected income stream for Bond #1:
Projected Reinvestment Rates
Year
Coupon
Interest ($)
Face
Value ($)
10%
5%
1
100
2
100
10.00
5.00
3
100
21.00
10.25
4
100
1000
33.10
15.76
Total Income
400
1000
64.10
31.01
c-What is the total cash available over the next four years to the bond holder earning
ii-10%
iii-15%
d-What is the average annual rate of return for the bond holder earning
ii-10%
iii-15%
e-Why does the reinvestment rate affect the annual rate of return for the same bond?
f-If the expected rate of return on our bonds is 10%, what is the duration of Bond #1?
You have been hired to analyze the debt securities of your organization. The firm has outstanding loans and bonds. A quick review of the balance sheet shows the following:
Liability | Nominal | Years to | |
Selected Liabilities of the firm | |||
Simple Loans | 800 | 5% | 1 |
Fixed-Payment Loans | 5,000 | 12% | 19 |
Long-term Bonds #1 | 500,000 | 10% | 4 |
Long-term Bonds #2 | 1,080,000 | 10% | 10 |
Liabilities Total | 1,585,800 | ||
Market Price for Bond #1 | 930.50 | ||
Market Price for Bond #2 | 859.50 | ||
Face Value of Each Bond | 1,000.00 | ||
Selected Current Assets of the firm | |||
Marketable Securities: | |||
Treasury Bills | 100,000 |
Note: Treasury Bills have a $10,000 face value, which matures in one year. Each Treasury Bill has a cost of $9,580.00
1-How much interest would the firm pay each year on the simple-interest loan?
2-How much would you write a cheque for to pay off the loan in one year?
3-What is the monthly payment needed to pay off the fixed-payment loans?
4-What is the current yield for each bond if the current price is:
a-$930.50 for Bond #1?
b-$859.50 for Bond #2?
5-What is the expected yield to maturity for each bond?
a-Bond #1 selling for $930.50?
b-Bond #2 selling for $859.50
6-What is the rate of capital gain if both bonds sell for $900.00 in one year?
a-Bond #1 selling for $930.50 today?
b-Bond #2 selling for $859.50 today?
7-If the Yield to Maturity expected by investors changes to 11%:
a-What will be the market price of Bond #1?
b-What will be the market price for Bond #2?
c-What will be the dollar change in price for Bond #1?
d-What will be the dollar change in price for Bond #2?
e-What will be the percent change in price for Bond #1?
f-What will be the percent change in price for Bond #2?
g-Since the change in expected yield to maturity is the same, why is the amount of change different between the bonds?
8-If investors holding our 4-year bonds (Bond #1) receive interest income annually for four years, plus the face value of the bonds at maturity,
a-What will be the total interest earned on the bond over the next four years?
b-What will be the face value received at maturity?
Given the following projected income stream for Bond #1:
Projected Reinvestment Rates | ||||
Year | Coupon | Face | 10% | 5% |
1 | 100 | |||
2 | 100 | 10.00 | 5.00 | |
3 | 100 | 21.00 | 10.25 | |
4 | 100 | 1000 | 33.10 | 15.76 |
Total Income | 400 | 1000 | 64.10 | 31.01 |
c-What is the total cash available over the next four years to the bond holder earning
ii-10%
iii-15%
d-What is the average annual rate of return for the bond holder earning
ii-10%
iii-15%
e-Why does the reinvestment rate affect the annual rate of return for the same bond?
f-If the expected rate of return on our bonds is 10%, what is the duration of Bond #1?