Finance HW (12 set of questions)

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1.

(Floating-rate loans) The Bensington Glass Company entered into a loan agreement with the firm’s bank to finance the firm’s working capital. The loan called for a floating rate that was 26 basis points (0.26 percent) over an index based on LIBOR. In addition, the loan adjusted weekly based on the closing value of the index for the previous week and had a maximum annual rate of 2.21 percent and a minimum of 1.76 percent. Calculate the rate of interest for weeks 2 through 10.

Week 1 is 1.96% LIBOR

Week 2 is 1.67% LIBOR

The rate of interest for week 2 is ___ % (Round to 2 decimal places.)

2. 

 (Bond valuation) Calculate the value of a bond that matures in 13 years and has a $1,000 par value. The annual coupon interest rate is 15 percent and the market’s required yield to maturity on a comparable-risk bond is 11%.

The value of the bond is $___. (Round to nearest cent)

3.

(Bond valuation) A bond that matures in 13 years has a $1,000 par value. The annual coupon interest rate is 12% and the market’s required yield to maturity on a comparable-risk bond is 14%. What would be the value of this if it paid interest annually? What would be the value of this if it paid interest semiannually?

4.

(Bond valuation) Pybus Inc. is considering issuing bonds that will mature in 23 years with an annual coupon rate of 9%. Their par value will be $1,000, and the interest will be paid semiannually. Pybus is hoping to get an AA rating on its bonds and, if it does, the yield to maturity on similar AA bonds is 9.5%. However, Pybus is not sure whether the new bonds will receive an AA rating. If they receive an A rating, the yield to maturity on similar A bonds is 10.5%. What will be the price of these bonds if they receive either an A or AA rating? (Round to the nearest cent.)

5.

(Yield to maturity) The market price is $1,175 for a 16-year bond ($1,000 par value) that pays 9% annual interest, but makes interest payments on a semiannual basis (4.5 % semiannually). What is the bond’s yield to maturity? (Round to 2 decimal places)

6.

(Bond valuation) Doisneau 22 year bonds have an annual coupon interest of 12%, make interest payments on a semiannual basis, and have a $1,000 par value. If the bonds are trading with a market’s required yield to maturity of 14%, are these premiums or discount bonds? What is the price of the bonds? (Round to nearest cent.)

7.

(Bond valuation) Fingen’s 15-year, $1,000 par value bonds pay 9% interest annually. The market price of the bonds is $1,130 and the market’s required yield to maturity on a comparable-risk bond is 6%. (Round to 2 decimal places.)

a. Compute the bond’s yield to maturity?

b. Determine the value of the bond to you, given your required rate of return.

c. Should you purchase the bond?

8.

(Yield to maturity) Abner Corporation’s bonds mature in 22 years and pay 13% interest annually. If you purchase the bonds for $1,150, what is your yield to maturity? (Round to 2 decimal places.) 

9.

(Bond valuation) The 8-year $1,000 par bonds of Vail Inc. pay 12% interest. The market’s required yield to maturity on a comparable-risk bond is 16%. The current market price for the bond is $880. (Round to 2 decimal places.)

a. Determine the yield to maturity.

b. What is the value of the bonds to you given the yield to maturity on a comparable-risk bond?

c. Should you purchase the bond at current market price?

10.

(Yield to maturity) The Saleemi Corporation’s $1,000 bonds pay 11% interest annually and have 11 years until maturity. You can purchase the bond for $1,105. (Round to 2 decimal places.)

a. What is the yield to maturity on this bond?

b. Should you purchase the bond if the yield to maturity on a comparable risk bond is 11%?

11.

(Bond valuation relationships) The 18-year , $1,000 par value bonds of Waco Industries pay 12% interest annually. The market price of the bond is $935, and the market’s required yield to maturity on a comparable-risk bond is 14%. (Round to 2 decimal places)

a. Compute the bond’s yield to maturity.

b. What is the value of the bonds to you given the yield to maturity on a comparable-risk bond?

c. Should you purchase the bond at current market price?

12.

(Inflation and Interest rates) What would you expect the nominal rate of interest to be if the real rate is 4.1% and the expected inflation rate is 7.5%? (Round to 2 decimal places)

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