Bond payments and coupon rates, business and finance homework help

    Question description

    1.  A 25-year bond
    with a face value of $1,000 has a coupon rate of 8.50%, with semiannual
    payments.
    What is the bond payment for this bond?Enter the cash flows for the bond on a timeline
    ———————-
    2. Assume that a bond will make payments every six months as
    shown on the following timeline:
    Period 0     1             

             17         18
    Cashflow  $45.00 
    $45.00  $45.00  $1,045.00
    What is the maturity of the bond (in years)?What is the coupon rate (in percent)?What is the face value?
    ———————-
    3. Explain why the yield of a bond that trades at a discount
    exceeds the bond’s coupon rate.
    ———————-
    4. Suppose a seven-year, $1,000 bond with a 4.08% coupon
    rate and semiannual coupons is trading with a yield to maturity of 2.81%.
      a. Is this bond
    currently trading at a discount, at par, or at a premium? Explain
      b. If the yield
    to maturity of the bond rises to 3.28% (APR with semiannual compounding), at
    what price will the bond rate?
    ———————-
    5. Assume the zero-coupon yields on default-free securities
    are as summarized in the following table:
    Maturity  1 yr  2 yrs  3 yrs  4 yrs  5 yrs
    Zero-Coupon Yields  3.80%  4.20%  4.50%  4.80%  5.20% 
    What is the price today of a five-year, zero-coupon
    default-free security with a face value of $1,000?
    ———————-
    6. Assume the zero-coupon yields on default-free securities
    are as summarized in the following table:
    Maturity  1 yr  2 yrs  3 yrs  4 yrs  5 yrs
    Zero-Coupon Yields  3.70%  4.20%  4.50%  4.80%  5.20% 
    What is the price today of a three-year, default-free
    security with a face value of $1,000 and an annual coupon rate of 2%?
    What is the yield to maturity for this bond?
    ———————-
    7. Why does the expected return of a corporate bond not
    equal its yield to maturity?
    ———————-
    8. Grummon Corporation has issued zero-coupon corporate
    bonds with a five-year maturity (assume $100 face value bond). Investors
    believe there is a 20% chance that Grummon will default on these bonds. If
    Grummon does default, investors expect to receive only 50 cents per dollar they
    are owed. If investors require a 6% expected return on their investment in
    these bonds, what will be the
      a. price of these bonds?
      b. yield to
    maturity on these bonds?
    ———————-
    9. What does it mean for a country to “inflate away” its
    debt?
    Why might this be costly for investors even if the country
    does not default?
    ———————-
    11. Your brother wants to borrow $10,000 from you. He has
    offered to pay you back $13,000 in a year. If the cost of capital of this
    investment opportunity is 8%, what is its NPV?
    Should you undertake the investment opportunity?
    Calculate the IRR and use it to determine the maximum
    deviation allowable in the cost of capital estimate to leave the decision
    unchanged.
    ———————-
    12. You are considering investing in a start up company. The
    founder asked you for $290,000 today and you expect to get $980,000 in 14
    years. Given the riskiness of the investment opportunity, your cost of capital
    is 21%. What is the NPV of the investment opportunity?
    Should you undertake the investment opportunity?
    Calculate the IRR and use it to determine the maximum
    deviation allowable in the cost of capital estimate to leave the decision
    unchanged.
    ———————-
    13. You have been offered a very long-term investment opportunity
    to increase your money one hundredfold. You can invest $500 today and expect to
    receive $50,000 in 40 years. Your cost of capital for this (very risky)
    opportunity is 23%. What does the IRR rule say about whether the investment
    should be undertaken?
    What about the NPV rule?
    Do you agree?
    ———————-
    14. You are considering opening a new plant. The plant will
    cost $104.8 million upfront and will take one year to build. After that, it is
    expected to produce profits of $28.5 million at the end of every year of
    production. The cash flows are expected to last forever. Calculate the NPV of
    this investment opportunity if your cost of capital is 6.7%. Should you make
    the investment?
    Calculate the IRR. Does the IRR rule agree with the NPV
    rule?
    Below is the cash flow timeline:
    Years  0 1 

    3  4  Forever
    Cashflow ($ million) 
    -104.8  $28.5  $28.5  28.5  28.5
    ————
    15. You are a real estate agent thinking of placing a sign
    advertising your services at a local bus stop. The sign will cost $6,000 and
    will be posted for one year. You expect that it will generate additional
    revenue of $660 a month.
    What is the payback period?
    ————–
    16. You are a real estate agent thinking of placing a sign
    advertising your services at a local bus stop. The sign will cost $5,000 and
    will be posted for one year. You expect that it will generate additional
    revenue of $500 a month. What is the payback period?
    ————–
    17. You are deciding between two mutually exclusive
    investment opportunities. Both require the same initial investment of $9.8
    million. Investment A will generate $2.08 million per year (starting at the end
    of the first year) in perpetuity. Investment B will generate $1.42 million at
    the end of the first year, and its revenues will grow at 2.2% per year for
    every year after that.
    a. Which investment has the higher IRR?
    b. Which investment has the higher NPV when the cost of
    capital is 6.6%?
    ———————
    18. You have just started your summer internship, and your
    boss asks you to review a recent analysis that was done to compare three
    alternative proposals to enhance the firm’s manufacturing facility. You find
    that the prior analysis ranked the proposals according to their IRR, and recommended
    the highest IRR option, Proposal A. You are concerned and decide to redo the
    analysis using NPV to determine whether this recommendation was appropriate.
    But while you are confident the IRRs were computed correctly, it seems that
    some of the underlying data regarding the cash flows that were estimated for
    each proposal was not included in the report. For Proposal B, you cannot find
    information regarding the total initial investment that was required in Year 0.
    And for Proposal C, you cannot find the data regarding additional salvage value
    that will be recovered in Year 3. Here is the information you have (in $
    millions):
    Proposal 
    IRR  Year 0  Year 1  Year 2  Year 3
    A  60.0%  -$100  $30  $153  $88
    B  51.9%  ?  $0  $206  $95
    C  50.7%  -$100  $37  $0  $204+?
    Fill in the missing values “?”Suppose the appropriate cost of capital for each
    alternative in 10%. Using this information, determine the NPV of each proposal.
    Which project should the firm choose?Can the IRR rule be used in this situation?
    Justify.
    ——————-
    19. Natasha’s Flowers, a local florist, purchases fresh
    flowers each day at the local flower market. The buyer has a budget of $985 per
    day to spend. Different flowers have different profit margins, and also a
    maximum amount the shop can sell. Based on past experience the shop has
    estimated the following NPV of purchasing each type:
     
    NPV per bunch  Cost per
    bunch  Max. Bunches
    Roses 
    $3 
    $25  $25
    Lilies  $10  $29  $10
    Pansies $4  $29  $10
    Orchids 
    $21  $81  $5
    What combination of flowers should the shop purchase each
    day?
    The profitability index for each choice is:????
    ———————
    20. You own a car dealership and are trying to decide how to
    configure the showroom floor. The floor has 2000 square feet of usable space.
    You have hired an analyst and asked her to estimate the NPV of putting a
    particular model on the floor and how much space each model requires:
    Model  NPV  Space Requirement (sq. ft).
    MB345  $2,500  200
    MC237  $4,000  250
    MY456  $3,500  240
    MG231  $1,500  150
    MT347  $9,000  450
    MF302  $2,000  200
    MG201  $2,500  150
    In addition, the showroom also requires office space. The
    analyst has estimated that office space generates a NPV of $14 per square foot.
    What models should be displayed on the floor and how many square feet should be
    devoted to office space?
    Complete the PI table below: (Round to two decimal spaces)
    Model  NPV  Space Requirement (sq. ft).  PI
    MB345  $2,500  200  ?
    MC237  $4,000  250  ?
    MY456  $3,500  240  ?
    MG231  $1,500  150  ?
    MT347  $9,000  450  ?
    MF302  $2,000  200  ?
    MG201  $2,500  150  ?

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