Financial Analysis

[Name of the Institute]

Financial Analysis

Problem 3

 

 

 

 

 

 

 

 

 

 

Page 29

 

 

Par Value

1000

 

 

Years to maturity

25 Years

 

 

Coupon Rate

6.40%

 

 

Yield to Maturity

7.50%

 

 

Current Price of the bond

??

 

 

 

 

Formula

 

 

Price of the bond

 

 

Coupon Rate*Face/Par Value*1-(1+interest rate%)^-n/Market interest rate+ Par value/(1+market interest)^n

 

 

 

6.4%*1000

1-(1.075)^-25/0.075+1000/(1.075)^25

 

 

877.3836

 

 

 

 

 

 

 

 

 

 

 

 

 

Problem 26

 

 

 

 

 

A

The number of coupon bonds to sell

45000000/1000

 

 

45000

 

 

 

 

PV

174.1101

 

 

The number of zero bonds to sell

45000000/174.110

 

 

258457.3

 

 

 

B

FV

45000000

 

 

PMT

.06*45000000

 

 

PMT

2700000

 

 

Repayment

47700000

 

Zero bonds

 

 

Bonds

258457

 

 

Par value

1000

 

 

Repayment

258457000

 

 

 

C

45000

bonds to sell

 

 

60

 

 

2700000

Per years interest rate

 

 

(1-0.35)

0.65

 

 

1755000

Cash outflow

 

Zero

 

 

FV

1000

 

 

n

30

 

 

i

6%

 

 

PV

174.1101309

 

 

PV

184.5567388

 

 

Interest

10.44660785

 

 

Bonds

258457

 

 

Tax Rate

0.35

 

 

Cash inflow

944999.6242

 

 

 

 

 

 

 

 

Question #8

 

 

 

 

 

 

 

 

 

 

Years

14.5

 

 

YTM

6.10%

 

 

Current Price

1038

 

 

 

 

P=1038=C(PVIFA, 3.4%,29)+1000(PVIFA,3.5%,29)

 

 

 

 

C=1038/27.40

 

 

37.88321168

 

 

Since it is semi annual payment therefore the coupon payment will be

 

2*37.883

 

 

75.76642336

 

 

Let the par value of the bond is 1000

 

Coupon Rate

0.075766423

 

 

 

 

 

 

Question #10

 

 

 

 

 

 

 

 

 

 

 

The fisher equation shows the exact relationship between nominal and real interest rate, and inflation is

 

(1+R)=(1+r)(1+h)

 

 

 

 

(1+2.5)=(1+4.1)(1+h)

 

 

(3.5)=(5.1)(1+h)

 

 

(1+h)=3.5/5.1

 

 

0.68627451

 

 

h=1-0.68627451

 

 

0.31372549

 

 

 

 

 

 

 

 

 

Question #12

 

 

 

 

(1+R)=(1+r)(1+h)

 

 

(1+.107)/(1+0.37)-1

 

 

0.808029197

 

r

0.191970803

 

 

r=19.19%

 

 

Question #1

Answer.

The yield to maturity is the required rate of the return on a bond expressed as a nominal annual interest rate. For non callable bonds the yield to maturity and the required rate of the return are interchangeable terms. Unlike Yield to Maturity and the required return, the coupon rate is not a return which is used as interest rate in the cash flow valuation of the bond but is a fixed percentage of the par over the life of the bond used for setting the coupon payment amount. For instance, coupon rate on bond is still 10% while the yield to maturity is 8% (Brodrick, 2010).

Question #14

Answer.

If the bond is sold on 100% of par, then the bond is premium bond. Thus, the current yield is

Current Yield = Annual Coupon Payment /Price = 75/1255.00

Current Yield = 5.978%

Under ASK YLD column, YTM = 5.32%

Bid Ask Spread = 125:16-125:15 = 1/32

It is intermediate.

Question #18

Answer.

 

 

 

 

 

 

 

 

 

Coupon bonds

9.20%

 

 

Years to maturity

18

 

 

Selling price

106.80%

 

 

Current Yield

?

 

 

YTM

?

 

 

Annual Yield

?

 

 

 

 

Po

1068

 

 

Po

1068=(PVIFA9.2%, 18)+1000(PVIFA8%,18)

 

 

1068/260.759

 

 

4.095728

%

 

 

 

 

Semiannual interest payment

 

 

YTM=2*4.095728

 

 

8.191456

 

 

Current Yield= Annual Coupon Payment/Price

 

 

0.078652

 

 

Effective annual yield = (1+0.04095)^2-1

 

 

0.083577

 

 

 

 

 

 

 

 

 

The case Study Solution

Data

The bond issuer/the borrower/the bosses: Mark Sexton and Todd Story

Bond value: $35 million

Bond maturity: 10 years

Answer 1.

A bond will have lower coupon rate if it is with collateral. A Bond holder has the claim on the collateral, even in bankruptcy (Brodrick et al, 2010). There is an asset provided by collateral so that bond holders can claim, in this way the risk is reduced in case of default. The down side of collateral is that the company generally cannot sell the asset used as collateral, and they have to keep an asset in good working order (Brigham, 2011).

Answer2.

Senior bonds get the full payment in the bankruptcy proceeding before subordinates bonds receive any repayment. It is obvious that the more the seniority of the bond the coupon rate will be lower. A problem might arise in that the bond covenant may restrict the firm by issuing any future bonds to the current bonds.

Answer3.

Because of the sinking cost the coupon rate will be reduced because bond holders are being guaranteed partially. Sinking fund has the problem because the Firm has to make the interim payments into face default. So, it means the firm must be able to generate the cash flows.

Answer 4.

A provision having particular prices and call date will increase the coupon rate. The call provision can only be used when this on the advantage for the business, thus it is disadvanatge for the bond ...