How to compute with financial calculatore

Assume that you are considering the purchase of a $1,000 par value bond that pays interest

of $70. each six months and has 10 years to go before it matures. If you buy this bond, you expect to hold it for 5 years and then to sell it in the market. You (and other investors) currently require a nominal annual rate of 16 percent, but you expect the market to require a nominal rate of only 12 percent when you sell the bond due to a general decline in interest rates. How much should you be willing to pay for this bond?

$842.00

$1,115.81

$1.359.26

$966.99

$731.85

7. Kennedy Gas Works has bonds which mature in 10 years, and have a face value of $1,000. . The bonds have a 10 percent quarterly coupon (i.e., the nominal coupon rate is 10 percent).

The bonds may be called in five years. The bonds have a nominal yield to maturity of 8 percent and a yield to call of 7.5 percent. What is the call price on the bonds?

$ 379.27

$1,025.00

$1,048.34

$1,036.77

$1,136.78

8. Bankruptcy Re-Org and Debt Re-Structuring

Recently, Ohio Hospitals, Inc. filed for bankruptcy. The firm was reorganized as American

Hospitals, Inc., and the court permitted a new indenture on an outstanding bond issue to be

put into effect. The issue has 10 years to maturity and a coupon rate of 10 percent, paid

annually. The new agreement allows the firm to pay no interest for 5 years. Then, interest

payments will be resumed for the next 5 years. Finally, at maturity (Year 10), the principal

plus the interest that was not paid during the first 5 years will be paid. However, no interest

will be paid on the deferred interest. If the required annual return is 20 percent, what should

the bonds sell for in the market today?

9. Zero Coupon Bonds

Suppose your company needs to raise $10 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 9 percent, and youre evaluating two issue alternatives: a 9 percent annual coupon bond, and a zero coupon bond. Your companys tax rate is 35 percent.

How many of the coupon bonds would you need to issue to raise the $10 million? How many of the zeroes would you need to issue?

In 20 years, what will your companys repayment be if you issue the coupon bonds? What if you issue the zeroes?

Consider the firms after tax cash flow for the first year under the two scenarios. Why would you want to ever issue zero coupon bonds?

10. Bond vs. Mortgage

Suppose Hadden Inc. is negotiating with an insurance company to sell it a bond issue. Each bond has a par value of $1,000, it would pay 10% per year in quarterly payments of $25 per quarter for 10 years, and then it would pay 12% per year ($30 per quarter) for the next 10 years (Years 11-20). The $1,000 principal would be returned at the end of 20 years. The insurance companys alternative investment is in a 20-year mortgage which has a nominal rate of 14 percent and which provides monthly payments. If the mortgage and the bond issue are equally risky, how much should the insurance company be willing to pay Hadden for each bond?