FINANCIAL MANAGEMENT ASSIGNMENT

Chapter 5 Problems

BAHRIA UNIVERSITY
Semester IV

Submitted by:

Kubra Fatima

29th March 2015

5-7
Renfro Rentals has issued bonds that have a 10% coupon rate, payable
semiannually. The bonds mature in 8 years, have a face value of $1,000 and a yield
to maturity of 8.5%. What is the price of the bonds?

Solution
Years

CF

PV Factor

PV

( 8.5% / 2 )
1 16
572.0154747
16

50

1000

11.44030949
0.5137868465
Price

513.7868465
=

1085.80

5-8
Thatcher Corporation's bonds will mature in 20 years. The bonds have a face value
of $1,000 and an 12% coupon rate, paid semiannually. The price of the bonds is
$850. The bonds are callable in 5 years at a call price of $1,050. What is their yield
to maturity? What is their yield to call?

Solution
(a) Yield to Maturity (YTM)
Years

CF

PV Factor

PV

( 10% )
0

(1100)

1 10
491.5653685
10

80

1000

(1100)

6.144567106
0.3855432894

385.5432894
(222.8913421)

Years

CF

PV Factor

PV

( 6% )
0

(1100)

1 10
491.5653685
10

1000

80

(1100)

7.360087051
0.5583947769

558.3937769
47.20174102

Calculating IRR using Interpolation,

2

Financial Management Assignment

=A+

* (B A)

ab
= 6% +

47.20174102

* (10% - 6%)

47.20174102 (222.8913421)
= 6% +

47.20174102

* (4%)

270.0930831
= 6% + 0.6990440552%
= 6.6990440552%
YTM = 6.70%
(b) Yield to Call (YTC)
Years

CF

PV Factor

PV

( 10% )
0

(1050)

(1050)

15

80

3.790786769

303.2629416

1000

0.6209213231

620.9218231
(125.8157353)

Years

CF

PV Factor

PV

( 6% )
0

(1050)

(1050)

15

80

4.212363786

336.9891028

1000

0.7472581729

747.2581729
34.24727567

Calculating IRR using Interpolation,

=A+

* (B A)

ab
= 6% +

34.24727567

* (10% - 6%)

34.24727567 (125.8157353)
= 6% +

34.24727567

* (4%)

106.063011
= 6% + 0.855844844%
= 6.855844844%
3

Financial Management Assignment

YTC = 6.85%

5-10
The Brownstone Corporations bonds have 5 years remaining to maturity. Interest is paid annually, the
bonds have a $1,000 par value, and the coupon interest rate is 9%.
a. What is the yield to maturity at a current market price of (1) $829 or (2) $1,104?
b. Would you pay $829 for one of these bonds if you thought that the appropriate rate of interest was 12%
that is, if rd = 12%? Explain your answer.

Solution
(a) (1) $ 829
Years

CF

PV Factor

PV

( 12% )
0

(829)

(829)

15

90

3.604776202

324.4298582

1000

0.5674268557

567.4268557
62.856713918

Years

CF

PV Factor

PV

( 15% )
0

(829)

(829)

15

90

3.352155098

301.6939588

1000

0.4971767353

497.1767353
(30.1293059)

Calculating IRR using Interpolation,

=A+

* (B A)

ab
= 12% +

62.856713918

* (15% - 12%)

62.856713918 (30.1293059)
= 12% +

62.856713918
92.98601982

= 12% + 2.027940782%
= 14.027940782%
= 14%

Financial Management Assignment

* (3%)

(a) (2) $ 1,104

Years

CF

PV Factor

PV

( 12% )
0

(1104)

(1104)

15

90

3.604776202

324.4298582

1000

0.5674268557

567.4268557
(212.1432861)

Years

CF

PV Factor

PV

( 8% )
0

(1104)

(1104)

15

90

3.992710037

359.3439033

1000

0.680583197

680.583197
(64.07289967)

Years

CF

PV Factor

PV

( 6% )
0

(1104)

(1104)

15

90

4.212363786

379.1127407

1000

0.7472581729

747.2581729
22.37091357

Calculating IRR using Interpolation,

=A+

* (B A)

ab
= 6% +

22.37091357

* (8% - 6%)

22.37091357 (64.07289967)
= 6% +

22.37091357

* (2%)

86.44381324
= 6% + 0.5175827565%
= 6.5175827565%
= 6.5%

Financial Management Assignment

(b)
Yes. At a price of $829, the yield to maturity, 14%, is greater than your
required rate of return of 12%. If your required rate of return were 12%, you
should be willing to buy the bond at any price below about $890.

5-12
A 10 year, 12% semiannual coupon bond with a par value of $1,000 may be called in 4 years at a call
price of $1,060. The bond sells for $1,100. (Assume that the bond has just been issued.)
a. What is the bond's yield to maturity?
b. What is the bond's current yield?
c. What is the bond's capital gain or loss yield?
d. What is the bond's yield to call?

Solution
(a)
Years

CF

PV Factor

PV

( 15% )
0

(1100)

1 10
602.2522351
5

120

1000

(1100)

5.018768626
0.2471847061

247.1847061
(250.5630588)

Years

CF

PV Factor

PV

( 10% )
0

(1100)

1 10
737.3420527
5

120

1000

(1100)

6.144567106
0.3855432894

385.5432894
22.89134213

Calculating IRR using Interpolation,

=A+

* (B A)

ab
= 10% +

22.89134213

* (15% - 10%)

22.89134213 (250.5630588)
= 10% +

22.89134213
273.4544009

= 10% + 0.41855867%
6

Financial Management Assignment

* (5%)

= 10.41855867%
= 10.42%
(b)
Current Yield =

Interest

* 100%

c price
Current Yield =

120

* 100%

1100
Current Yield = 10.90909091%
Current Yield = 10.91%
(c)
YTM = CY + Gain / Loss
10.41% = 10.91 + Gain / Loss
Loss = 10.41% - 10.91
Loss = - 0.50%
(d)
Years

CF

PV Factor

PV

( 15% )
0

(1060)

(1060)

14

120

2.854978363

342.5974036

1000

0.5717532456

5717532456
(145.6493508)

Years

CF

PV Factor

PV

( 10% )
0

(1060)

(1060)

14

120

3.169865446

380.3838536

1000

0.6830734554

683.0734554
3.397308965

Financial Management Assignment