1) Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays 7 percent annual interest and has 16 years remaining to maturity. The current yield to maturity on similar bonds is 15 percent. a. What is the current price of the bonds?

b. By what percent will the price of the bonds increase between now and maturity?

2) North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed

dividend of $6 per share. With the passage of time, yields have soared from the

original 6 percent to 14 percent (yield is the same as required rate of return).

a. What was the original issue price?

b. What is the current value of this preferred stock?

c. If the yield on the Standard & Poor's Preferred Stock Index declines, how

will the price of the preferred stock be affected?

3) The Short-Line Railroad is considering a $140,000 investment I either of two companies. The cash flows are as follows:

Year	Electric Co.	Water Works
1	$85,000	$30,000
2	$25,000	$25,000
3	$30,000	$85,000
4-10	$10,000	$10,000

A Using the payback method, what will the decision be?

B Explain why the answer in part A can be misleading.

4) Turner Video will invest $76,344 in a project. The firm's cost of capital is 10 percent. The investment will provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer using the formula and financial calculator methods. Year Inflow 1 $ 15,000 2 17,000 3 21,000 4 25,000 5 29,000 The internal rate of return is 11 percent.

a. If the reinvestment assumption of the net present value method is used, what will be the total value of the inflows after five years?

b. If the reinvestment assumption of the internal rate of return method is used, what will be the total value of the inflows after five years?

c. Which investment assumption is better?