Bond problem 1. You won the recent Powerball lottery and now have lots of cash to spend. To share your good fortune with your fellow ASU alumni, you are looking to make an investment in a new start-up by an ASU alum with the hopes of generating a large return on your investment. One of your friends suggested FSL Incorporated because he is using their software and thinks it is high quality. FSL is a new start-up company developing accounting software. The company currently has 3 employees writing code and your friend is their only client. FSL is selling 8% coupon bonds that mature in 5 years and have a par value of $1,000. How would you rate the risk of FSL? Coca Cola Tesla Government Bonds No risk 3% Low risk 8% Moderate Risk 11% High Risk 15% Very high risk 20% Extreme Risk 35% I rate the risk of FSL as Therefore, the interest rate to price the bond is Based on your answer above, find the value of the bond today: Question Answer Hints Annuity payment per year from the bond coupon rate x Par PVFA 1-(1+r)-n PVFA = r PV of the coupon payments The coupon payments are an annuity PV of the lump sum payment FV PV of a lump sum = (1 + r)n PV of the coupon payments + PV of the lump sum Value of the bond today 3 Bond problem 1 (continued) Suppose you hear on the news tonight that FSL just signed a contract with the City of Phoenix to provide all of their accounting software for the next 20 years. Based on this information, repeat the exercise above and determine a new value for the bond given the new information. With the new information I rate the risk of FSL as Therefore the interest rate to price the bond is Explain why your value changed Annuity payment from the bond PVFA PV of the coupon payments PV of the lump sum payment Value of the bond today Bond problem 1. You won the recent Powerball lottery and now have lots of cash to spend. To share your good fortune with your fellow ASU alumni, you are looking to make an investment in a new start-up by an ASU alum with the hopes of generating a large return on your investment. One of your friends suggested FSL Incorporated because he is using their software and thinks it is high quality. FSL is a new start-up company developing accounting software. The company currently has 3 employees writing code and your friend is their only client. FSL is selling 8% coupon bonds that mature in 5 years and have a par value of $1,000. How would you rate the risk of FSL? Coca Cola Tesla Government Bonds No risk 3% Low risk 8% Moderate Risk 11% High Risk 15% Very high risk 20% Extreme Risk 35% I rate the risk of FSL as Therefore, the interest rate to price the bond is Based on your answer above, find the value of the bond today: Question Answer Hints Annuity payment per year from the bond coupon rate x Par PVFA 1-(1+r)-n PVFA = r PV of the coupon payments The coupon payments are an annuity PV of the lump sum payment FV PV of a lump sum = (1 + r)n PV of the coupon payments + PV of the lump sum Value of the bond today 3 Bond problem 1 (continued) Suppose you hear on the news tonight that FSL just signed a contract with the City of Phoenix to provide all of their accounting software for the next 20 years. Based on this information, repeat the exercise above and determine a new value for the bond given the new information. With the new information I rate the risk of FSL as Therefore the interest rate to price the bond is Explain why your value changed Annuity payment from the bond PVFA PV of the coupon payments PV of the lump sum payment Value of the bond today