FIN 300 Final: Final Exam Study guide_1.doc
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Minicase 1
Interest Rates, Bond Yields, and Duration
CONCEPTS IN THIS CASE
simple loans
fixed-payment loans
coupon bonds
present value
yield-to-maturity
current yield
nominal and real interest rates
rate of return
capital gain
interest-rate and reinvestment risk
duration
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
How much interest would the firm pay each year on the simple-interest loan?
How much would you write a cheque for to pay off the loan in one year?
What is the monthly payment needed to pay off the fixed-payment loans?
What is the current yield for each bond if the current price is:
$930.50 for Bond #1?
$859.50 for Bond #2?
What is the expected yield to maturity for each bond?
Bond #1 selling for $930.50?
Bond #2 selling for $859.50
What is the rate of capital gain if both bonds sell for $900.00 in one year?
Bond #1 selling for $930.50 today?
Bond #2 selling for $859.50 today?
If the Yield to Maturity expected by investors changes to 11%:
What will be the market price of Bond #1?
What will be the market price for Bond #2?
What will be the dollar change in price for Bond #1?
What will be the dollar change in price for Bond #2?
What will be the percent change in price for Bond #1?
What will be the percent change in price for Bond #2?
Since the change in expected yield to maturity is the same, why is the amount of change different between the bonds?
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,
What will be the total interest earned on the bond over the next four years?
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 |
What is the total cash available over the next four years to the bond holder earning
10%
15%
What is the average annual rate of return for the bond holder earning
10%
15%
Why does the reinvestment rate affect the annual rate of return for the same bond?
If the expected rate of return on our bonds is 10%, what is the duration of Bond #1?
What is the yield to maturity on the Treasury Bills (a discount bond)?
What is the real rate of interest if the nominal rate is 10% and the inflation rate is 3%?
Copyright © 2000â2001 Addison Wesley Longman, a division of Pearson Education
Adaptation copyright © 2002 Pearson Education Canada
The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the smaller the percentage of the payment that will be a repayment of principal.
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2. The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.
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3. A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.
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4.Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
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5. A 15-year bond has an annual coupon rate of 8%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 6%. Which of the following statements is CORRECT?
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6. Which of the following statements is CORRECT?
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7. Your investment account pays 6.8%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?
Select the correct answer.
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8. You want to purchase a motorcycle 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?
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9. Suppose you earned a $135,000 bonus this year and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?
Select the correct answer.
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10.Your older brother turned 35 today, and he is planning to save $30,000 per year for retirement, with the first deposit to be made one year from today. He will invest in a mutual fund that's expected to provide a return of 7.5% per year. He plans to retire 30 years from today, when he turns 65, and he expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can he spend each year after he retires? His first withdrawal will be made at theend of his first retirement year.
Select the correct answer.
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11. Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%. Each bond has face value of $1,000 and makes semiannual interest payments. If you require an 11% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
Select the correct answer.
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12. Haswell Enterprises' bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000 . The going interest rate (rd) is 9.75%, based on semiannual compounding. What is the bond's price?
Select the correct answer.
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