1. Myra Breck must choose between two bonds:

Bond A pays $120 annual interest with semiannual payment and has a market value of $760. It has 10 years to maturity.

Bond B pays $120 annual interest with semiannual payment and has a market value of $860. It has 2 years to maturity.

Assume the par value of the bonds is $1,000.

a.Compute the current yield on both bonds.(Round the final answers to 2 decimal places.)

	Current yield
Bond A	%
Bond B	%

b.Which bond should she select based on the answer to parta?

multiple choice 1

• Bond A
• Bond B

c.A drawback of current yield is that it does not consider the total life of the bond. What is the yield to maturity on these bonds?(Do not round intermediate calculations. Round the final answers to 2 decimal places.)

	Yield to maturity
Bond A	%
Bond B	%

d.Has the answer changed between partsbandcof this question?

multiple choice 2

• Yes
• No

2. Match the yield to maturity in column 2 with the appropriate debt security in column 1.

(1)	(2)
Debenture	8.59%
Secured debt	10.67%
Subordinated debenture	9.79%

Secured debt	(Click to select) 8.59% 10.67% 9.79%
Debenture	(Click to select) 8.59% 10.67% 9.79%
Subordinated debenture	(Click to select) 8.59% 10.67% 9.79%

3. The yield to maturity for 20-year bonds is as follows for four different bond rating categories.

AAA	10.00%	A	11.00%
AA	10.20	BBB	11.20

The bonds of Falter Corporation were rated as AAA and issued at par a few weeks ago. The bonds have just been downgraded to AA. Determine the new price of the bonds, assuming a 20-year maturity and semiannual interest payments. Assume the par value of the bonds is $1,000.(Use a Financial calculator to arrive at the answers. Round the final answer to 2 decimal places.)

Price of the bonds $

4. A $1,000 par value bond was issued 30 years ago at a 8.50 percent coupon rate, paid semiannually. It currently has 20 years remaining to maturity. Interest rates on similar debt obligations are now 6 percent.(Use a Financial calculator to arrive at the answers.)

a.What is the current price of the bond?(Round the final answer to 2 decimal places.)

Price of the bond $

b.Assume Igor Sharp bought the bond three years ago, when it had a price of $1,030. What is his dollar profit based on the bond's current price?(Round the final answer to 2 decimal places.)

Dollar profit $

c.Further assume Igor Sharp paid 20 percent of the purchase price in cash and borrowed the rest (known as buying on margin). Igor used the interest payments from the bond to cover the interest costs on the loan. How much of the purchase price of $1,030 did Igor Sharp pay in cash?

Purchase price $

d.What is Igor's percentage return on his cash investment? Divide the answer to partbby the answer to partc.(Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Percentage return %

e.This part of the question is not part of your Connect assignment.

5. The Wagner Corporation has a $24 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 11 percent, the interest rates on similar issues have declined to 8.6 percent. The bonds were originally issued for 25 years and have 21 years remaining. The new issue would be for 21 years. There is a 8 percent call premium on the old issue. The underwriting cost on the new $24 millionissue is $590,000, and the underwriting cost on the old issue was $440,000. The company is in a 30 percent tax bracket, and it will allow an overlap period of one month (1/12 of the year). Treasury bills currently yield 3 percent.(Do not round intermediate calculations. Enter the answers in whole dollars, not in millions. Round the final answers to nearest whole dollar.)

a.Calculate the present value of total outflows.

Total outflows $

b.Calculate the present value of total inflows.

Total inflows $

c.Calculate the net present value.

Netpresent value $

d.Should the old issue be refunded with new debt?

multiple choice

• Yes
• No

6. The Harding Corporation has $51.1 million of bonds outstanding that were issued at a coupon rate of 12.25 percent seven years ago. Interest rates have fallen to 11 percent. Preston Alter, the vice-president of finance, does not expect rates to fall any further. The bonds have 18 years left to maturity, and Preston would like to refund the bonds with a new issue of equal amount also having 18 years to maturity. The Harding Corporation has a tax rate of 30 percent. The underwriting cost on the old issue was 3.6 percent of the total bond value. The underwriting cost on the new issue will be 1.8 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with an 8 percent call premium starting in the sixth year and scheduled to decline by one-half percent each year thereafter (Consider the bond to be seven years old for purposes of computing the premium). UseAppendix D.

a.Compute the discount rate.

Discount rate %

b.Calculate the present value of total outflows.(Enter the answers in whole dollars, not in millions. Round "PV Factor" to 3 decimal places. Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

Total outflows $

c.Calculate the present value of total inflows.(Enter the answers in whole dollars, not in millions. Round "PV Factor" to 3 decimal places. Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

Total inflows $

d.Calculate the netpresent value.(Enter the answers in whole dollars, not in millions. Round "PV Factor" to 3 decimal places. Do not round intermediate calculations. Round the final answer to nearest whole dollar. Negative amount should be indicated by a minus sign.)

Netpresent value $

e.Should the Harding Corporation refund the old issue?

multiple choice

• No
• Yes

7. Providence Industries has an outstanding debenture of $25 million that was issued when flotation costs could be expensed immediately. It carries a coupon rate of 10 percent and has 15 years to maturity. Currently, similar risk bonds are yielding 9 percent over a 15-year period, and Providence is wondering if a refunding would be economically sound. The existing debenture has a call premium of 5 percent at present. It is estimated that a new issue would require underwriting costs of $470,000 and other costs of $80,000. No overlap period would be required. Providence Industries has a tax rate of 25 percent. Its cost of capital is 16 percent.

a-1.Compute the discount rate.(Round the final answer to 2 decimal places.)

Discount rate %

a-2.Calculate the present value of total outflows.(Round "PV Factor" to 4 decimal places. Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

Total outflows $

a-3.Calculate the present value of total inflows.(Round "PV Factor" to 4 decimal places. Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

Total inflows $

a-4.Calculate the netpresent value.(Round "PV Factor" to 4 decimal places. Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

Netpresent value $

a-5.Should Providence Industries refund the old issue?

multiple choice

• Yes
• No