9 bond questions. Answers are provided. Please provide all steps and work. Please use TVM for calculations and show the appropriate inputs.

Homework Problems: Bonds (Fin. 338) 1. Four years ago, your firm issued $1,000 par, 25-year bonds, with a 7 percent annual coupon rate and a 10 percent call premium. a. If these bonds are now called, what is the approximate yield to call (YTC) for the investor who originally purchased them when they were issued? b. If these bonds are now called, what is the actual yield to call (YTC) for the investor who originally purchased them when they were issued? (Use the present value method for calculation.) c. If the current interest rate (yield-to-maturity) is 5 percent, what would an equivalent non-callable bond be selling for? 2. Assume that you purchase an 8 percent semi-annual, 20-year, $1,000 par bond, priced at $1,012.50, when it has 12 years remaining until maturity. a. What is the bond's approximate yield-to-maturity (YTM)? b. What is the bond's actual yield-to-maturity (YTM)? c. If the bond is callable in 3 years, what will its current yield-to-call (YTC) be? 3. Two years ago, you acquired a 10-year semi-annual zero-coupon, $1,000 par value bond at a 12% YTM. Recently you sold this bond at an 8 percent YTM. Compute the horizon yield (HY) for this investment. 4. Bonds of the Abel & Crawford Corporation with a par value of $1,000 sell for $960, mature in 5 years, and have a 7 percent semi-annual coupon rate. a. What is the bond's current yield? b. What is the bond's current yield-to-maturity (YTM)? c. What is the bond's horizon yield (or annualized total return) for an investor with a 3-year holding period and a reinvestment rate of 6 percent over that period? (Assume that at the end of the 3 years, the yield-to-maturity for similar bonds with 2 years left to run is 7%.) 5. You purchase a semi-annual coupon rate bond under the following assumptions: Coupon rate: 7.0% Maturity of bond: 28 years Current YTM: 6.25% Your intention is to hold the bond for 12 years, during which time you expect to receive a reinvestment rate on all coupon payments of 6.10%. Finally, at the time of sale you assume that the open market YTM will be 5.95%. Based upon the above items, find the horizon yield (HY) for this bond position. Homework Problems: Bonds (Fin. 338) 1 6. You purchase today a non-callable semi-annual coupon rate bond under the following conditions: Bond characteristics: Coupon rate: 5.0% Maturity of bond: 12 years Current YTM: 6.5% Expect hold assumptions: Expected hold period: 7 years Reinvestment rate (average money market return): 3.5% Expected YTM at sale: 5.0% Based upon the above items, find the Horizon Yield (HY) for this bond position. 7. You purchase today a callable annual coupon rate bond under the following conditions: Bond characteristics: Coupon rate: 7.5% Maturity of bond: 20 years Call Premium: 8% Time to call period: 4 years Current YTM: 8.5% Expected hold assumptions: Expected hold time: 4 years Reinvestment rate (average money market return): 2.1% Expected YTM (non-callable bonds) at sale: 4.0% Based upon the above items, find the Horizon Yield (HY) for this bond position. 8. You plan to purchase today 1000 shares of Snyder Chemical Works common stock at $22.50 per share. You intend to hold the stock for 5 years at which time you expect the stock's P/E to be 18. At the time of sale you expect the EPS of the company to be $3.10. If the company pays a dividend of $2.00 per share annually (i.e., $0.50 per quarter) and you expect to be able to reinvest the dividends at an average annual money market rate of 2%, what is your Horizon Yield (HY) for this stock position. 9. You own an apartment complex made up of 10 units each of which is rented out at a monthly rent of $1000. You purchased the facility 2 years ago for $1,000,000, and plan to hold the complex for another 8 years at which time you expect to sell the facility for $1,800,000. Assume your costs of operation for the complex (upkeep, property taxes, employee wages, etc.) amount to $7,500 per month. If you expect to reinvest any cash flows (net income) from the apartment complex at an annual reinvestment rate of 6.0%, what is your expected Horizon Yield for this real estate investment? (Assume a monthly reinvestment of net income payments over the year.) Homework Problems: Bonds (Fin. 338) 2 Answers to Homework Problems: Bonds (Fin. 338) 1. a. 9.05% b. 9.18% c. $1256.42 2. a. 7.85% b. 7.84% (0.078374) c. 9.86% (0.098648 3. a. $311.80 [purchase price] b. $533.91 [sale price] c. Horizon Yield: 30.86% Note: 1.) 2.) 3.) 4.) Purchase Price: $311.80 Future Value of Coupon Payments: $0 Sale Price: $533.91 End Wealth: $533.91 4. a. Current Yield: 7.29% b. YTM: 7.99% (0.07986) c. Horizon Yield: 8.51% Note: 1.) 2.) 3.) 4.) 5. Horizon Yield: 6.43% Note: 1.) 2.) 3.) 4.) 6. Purchase Price: $960 Future Value of Coupon Payments: $226.39 Sale Price: $1000.00 End Wealth: $1226.39 Purchase Price: $1098.58 Future Value of Coupon Payments: $1212.50 Sale Price: $1107.41 End Wealth: $2319.91 Horizon Yield: 6.84% Purchase Price: $876.34 FV annuity of coupon payments: $392.74 Sale price: $1000 Ending wealth: $1392.74 HY: 6.84% Homework Problems: Bonds (Fin. 338) 3 7. Horizon Yield: 11.3% Purchase Price: $905.37 FV annuity of coupon payments: $309.58 Sale price: $1080 (= Par * 1 + call premium, $1000 * 1.08) Ending wealth: $1389.58 HY: 11.3% 8. Horizon Yield: 24.12% Purchase Price: $22,500 ($22.50 * 1000 shares) FV annuity of dividend payments: $10,490 Sale price: $55,800 Ending wealth: $66,290 HY: 24.12% 9. Horizon Yield: 8.25% Purchase Price: $1,000,000 FV annuity of net income payments: $409,698.37 Sale price: $1,800,000 Ending wealth: $2,209,698.37 HY: 8.25% Homework Problems: Bonds (Fin. 338) 4