a)
To determine:
a)
Explanation of Solution
Given information:
Cost of debt is 7%,
M is $1,000 and n is 12 (2028-2016)
Calculation of interest:
Hence interest is $87.50
Calculation of value of bond:
Hence, value of bond is $1,139
b)
To determine: Value of bond as on April 15, 2016 with a required rate of return of 9%.
b)
Explanation of Solution
Given information:
Cost of debt is 9%,
M is $1,000 and n is 12 (2028-2016)
Interest is $87.50
Calculation of value of bond:
Hence, value of bond is $983
c)
To determine: Value of bond as on April 15, 2016 with a required rate of return of 9%.
c)
Explanation of Solution
Given information:
Cost of debt is 11%,
M is $1,000 and n is 12 (2028-2016)
Interest is $87.50
Calculation of value of bond:
Hence, value of bond is $854
Calculation of value of Company F bond at 8% interest rate:
Given information:
Cost of debt is 11%,
M is $1,000 and n is 24 (12x2 semi-annually)
Calculation of interest:
Hence, interest is $43.75
Calculation of value of bond:
Hence, value of bond is $1,057
Note: It is assumed that, this answer will require 8% nominal return, but not the effective return and the semi-annual discount rate would be 3.92%.
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Chapter 6 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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