Problem 16-12 (Algo) Zero-coupon bond yield [LO 16-2] Assume a zero-coupon bond that sells for $671 and will mature in 10 years at $1,450. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. What is the effective yield to maturity? Note: Assume annual compounding. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Effective yield to maturity % Piopien 10-17 (Aigo) Refunding decision [LU 10-5] The Bowman Corporation has an $25 million bond obligation outstanding that it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.7 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new $25,000,000 issue is $550,000, and the underwriting cost on the old issue was $440,000. The company is in a 35 percent tax bracket, and it will use an 11 percent discount rate to analyze the refunding decision. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Calculate the present value of total outflows. Note: Do not round intermediate calculations and round your answer to 2 decimal places. PV of total outflows b. Calculate the present value of total inflows. Note: Do not round intermediate calculations and round your answer to 2 decimal places. PV of total outflows c. Calculate the net present value. Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places. Net present value d. Should the old issue be refunded with new debt? Yes No Problem 16-2 (Algo) Bond yields [LO 16-2] Preston Corporation has a bond outstanding with an annual interest payment of $80, a market price of $1,290, and a maturity date in 10 years. Assume the par value of the bond is $1,000. Find the following: Note: Use the approximation formula to compute the approximate yield to maturity and use the calculator method to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. a. Coupon rate b. Current yield c-1. Approximate yield to maturity c-2. Exact yield to maturity % % % % Problem 16-4 (Algo) Bond yields [LO 16-2] An investor must choose between two bonds: Bond A pays $105 annual interest and has a market value of $930. It has 12 years to maturity. Bond B pays $95 annual interest and has a market value of $920. It has 7 years to maturity. Assume the par value of the bonds is $1,000. a. Compute the current yield on both bonds. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Current Yield Bond A Bond B % % b. Which bond should the investor select based on your answers to part a? Bond A Bond B c. A drawback of current yield is that it does not consider the total life of the bond. For example, the approximate yield to maturity on Bond A is 11.57 percent. What is the approximate yield to maturity on Bond B? The exact yield to maturity? Note: Use the approximation formula to compute the approximate yield to maturity and use the calculator method to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Approximate yield to maturity Exact yield to maturity % % d. Has your answer changed between parts b and c of this question in terms of which bond to select? No Yes Problem 16-6 (Algo) Bond value [LO 16-2] The Florida Investment Fund buys 52 bonds of the Gator Corporation through a broker. The bonds pay 7 percent annual interest. The yield to maturity (market rate of interest) is 12 percent. The bonds have a 10-year maturity. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Using an assumption of semiannual interest payments: a. Compute the price of a bond. Note: Do not round intermediate calculations and round your answer to 2 decimal places. Price of the bond b. Compute the total value of the 52 bonds. Note: Do not round intermediate calculations and round your answer to 2 decimal places. Total value Appendix B Present value of $1, PV IF PV=FV[1 / (1 + i)"] Percent Period 1% 2% 1 0.990 0.980 2 0.980 0.961 3% 0.971 0.943 5% 6% 3 0.971 0.942 0.915 4 0.961 0.924 0.888 5 0.951 0.906 0.863 6 0.942 0.888 0.837 0.564 7 0.933 0.871 0.813 8 0.923 9 0.914 0.837 0.766 10 0.905 0.820 0.744 11 0.896 0.804 0.722 12 0.887 0.788 0.701 13 0.879 0.773 0.681 14 0.870 0.758 0.661 15 16 0.853 0.728 0.623 17 18 0.844 0.714 0.605 0.836 0.700 | 0.587 19 0.828 0.686 0.570 20 25 30 40 0.672 0.453 0.307 0.208 0.142 50 0.608 0.372 0.228 0.141 0.087 0.034 4% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 25% 30% 35% 40% 50% 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.800 0.769 0.741 0.714 0.667 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.640 0.592 0.549 0.510 0.444 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.512 0.455 0.406 0.364 0.296 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.515 0.499 0.482 0.410 0.350 0.301 0.260 0.198 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 0.328 0.269 0.223 0.186 0.132 0.790 0.746 0.705 0.666 0.630 0.596 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 0.262 0.207 0.165 0.133 0.088 0.760 0.711 0.665 0.623 0.583 0.547 0.296 0.279 0.210 0.159 0.122 0.095 0.059 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.266 0.249 0.233 0.168 0.123 0.091 0.068 0.039 0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 0.134 0.094 0.067 0.048 0.026 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 0.107 0.073 0.050 0.035 0.017 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.086 0.056 0.037 0.025 0.012 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 0.069 0.043 0.027 0.018 0.008 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 0.055 0.033 0.020 0.013 0.005 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 0.044 0.025 0.015 0.009 0.003 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 0.035 0.020 0.011 0.006 0.002 0.534 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 0.028 0.015 0.008 0.005 0.002 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 0.023 0.012 0.006 0.003 0.001 0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 0.018 0.009 0.005 0.002 0.001 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.014 0.007 0.003 0.002 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 0.012 0.005 0.002 0.001 0.780 0.610 0.478 0.375 0.295 0.233 0.184 0.146 0.116 0.092 0.074 0.059 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010 0.004 0.001 0.742 0.552 0.412 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.044 0.033 0.026 0.020 | 0.015 0.012 0.009 0.007 0.005 0.004 0.001 0.097 0.067 0.046 0.032 0.022 0.015 0.011 0.008 0.005 0.004 0.003 0.002 0.001 0.054 0.021 0.013 0.009 0.005 0.003 0.002 0.001 0.001 0.001 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0 0 0.001 0 0 0 0 0 0 0 0 0.001 0 0.001 0 0 0 0 0 0 0 0 0 0 0 Appendix D Present value of an annuity of $1, PV IFA PV =A[1 (1 / (1 + i)")] / i Period 1% 1 2% 0.990 0.980 0.971 3% 4% 5% 6% 2 1.970 3 2.941 0.962 1.942 1.913 1.886 2.884 2.829 2.775 0.952 1.859 2.723 7% 0.943 0.935 4 3.902 3.808 5 4.853 4.713 3.630 4.452 3.546 3.465 1.833 1.808 2.673 2.624 3.387 8% 0.926 1.783 2.577 3.312 3.993 6 5.795 4.623 7 6.728 6.472 8 7.652 9 8.566 10 9.471 8.162 7.786 7.435 8.983 8.530 8.111 11 10.368 9.787 9.253 8.760 12 11.255 10.575 9.954 9.385 13 12.134 11.348 10.635 9.986 14 15 13.865 12.849 11.938 16 14.718 13.578 12.561 17 15.562 14.292 13.166 12.166 11.274 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 19 20 25 30 8.544 8.022 7.549 8.756 8.201 7.702 17.226 15.678 14.324 13.134 12.085 11.158 10.336 8.950 8.365 7.839 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.129 8.514 7.963 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.823 9.077 8.422 7.843 25.808 22.396 19.600 17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.694 9.763 9.372 9.604 9.818 40 32.835 27.355 23.115 19.793 17.159 15.046 13.332 11.925 10.757 9.779 50 8.951 39.196 31.424 25.730 21.482 18.256 15.762 13.801 12.233 10.962 9.915 9.042 Percent 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 25% 30% 35% 40% 50% 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.800 0.769 0.741 0.714 0.667 1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 1.440 1.361 1.289 1.224 1.111 2.531 2.487 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 1.952 1.816 1.696 1.589 1.407 3.717 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 2.362 2.166 1.997 1.849 1.605 4.580 4.329 4.212 4.100 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 2.689 2.436 2.220 2.035 1.737 5.601 5.417 5.242 5.076 4.917 4.767 4.486 4.355 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 2.951 2.643 2.385 2.168 1.824 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 3.161 2.802 2.508 2.263 1.883 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 3.329 2.925 2.598 2.331 1.922 7.108 6.802 6.515 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 3.463 3.019 2.665 2.379 1.948 7.722 7.360 7.024 6.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 3.571 3.092 2.715 2.414 1.965 8.306 7.887 7.499 7.139 6.805 6.495 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 3.656 3.147 2.752 2.438 1.977 8.863 8.384 7.943 7.536 7.161 6.814 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439 3.725 3.190 2.779 2.456 1.985 9.394 8.853 8.358 7.904 7.487 7.103 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 3.780 3.223 2.799 2.469 1.990 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 3.824 3.249 2.814 2.478 1.993 11.118 10.380 9.712 9.108 8.559 8.061 7.606 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 3.859 3.268 2.825 2.484 11.652 10.838 10.106 9.447 8.851 8.313 7.824 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 3.887 3.283 2.834 2.489 1.997 10.477 9.122 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.988 4.775 3.910 3.295 2.840 2.492 1.998 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 3.928 3.304 2.844 2.494 1.999 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 3.942 3.311 2.848 2.496 1.999 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870 3.954 3.316 2.850 2.497 1.999 7.330 6.873 6.464 6.097 5.766 5.467 5.195 4.948 3.985 3.329 2.856 2.499 2.000 8.055 7.496 7.003 6.566 6.177 5.829 5.517 5.235 4.979 3.995 3.332 2.857 2.500 2.000 8.244 7.634 7.105 6.642 6.233 5.871 5.548 5.258 4.997 3.999 3.333 8.304 7.675 7.133 6.661 6.246 5.880 5.554 5.262 4.999 4.000 3.333 1.995 2.857 2.500 2.000 2.857 2.500 2.000