2 1 7 7s 76 With your nancial calculator, enter the following: Ve = $985; M = $1,000; Int = 0.07 «$3,000 = $70. a, N= 10; 9 = 985; purr = 70; FV = 1000; y=? ‘Solve for INR = YIM = 7.2157% a 7.22%. b, N= 7; ye = 7.2857, pT = 70; FV = 1000; pv =? ‘Sole for Ve = PV = $988.46, “The problem asks you to fin the prie ofa bond, given the following fact: 8.5/2 = 4.25, PHT = 45; FV = 1000. Wath a financial calculator, solve for PY = $1,028.60. <8= 16,19 ‘Wan your financial calculator, enter the felling to find YIM: N= 10 2 = 20; pv = 1100; PMT = 0008/2 1,000 = 40; FY = 1000; 1¥R = YT YIM = 331% 2 = 652%. vie. a 1586: Bond L Bond S: 2. 8%: ond L: From Bond S inputs, change N = 15 and I/¥R = 8, PY = 2, PY = $1,17 119. Bond S: Change N'= 1, PV=? PV = $1,018.52. Bond L: From Bond S inputs, change N = 19 and IVR = 12, PV = ?, PV $263.78. Bond S: Change N= 4, PV=? Pv = $982.14. Think about a bond that matures in one month, Its present value i influenced primarily by the -matunty value, which wl be received in only one month. Even f interest rates double, the price ofthe bond wil sil be lose to $1,000. A 1-year bond's value would fluctuate mere than the ‘one-month bond's value because ofthe difference in the ting of receipts. However, ts value woul still be fay cose to $1,000 even ifinterest rates doubled. Along term bond paying ‘semiannual coupons, on the other hand, will be dominated by distant receipts, receipts that are multiplied by 1/(1 + r/2), and irq increases, these multipers will decrease significantly. “Anater way to view this problem from an opportunty pont of view. A I-month bond can be reinvested at the new rate very quicky, and hence the opportunity to invest at this new rate is rot lost; however, the long tex bond locks in Subnormal returns fora lang penod of time a Ime YearstoManurty Price of Bond Price of Bond Z 0 4 $4012.79 § GoB.08 tt 3 10.02 759.57 ta? 2 1005.88 ao 3 4 1003.65 swat a4 0 1000.00 1,000.00 b ond ice Bond Price Paths $1200 > ode $1000 $800 jan ond? 400 $200 30 YearsRemsning to MattyPrice at 8% 0-year, 0% annual coupon $1,134.20 10-year 2410 462.19 Seyear 220 690.58 30-year zero 99:38 $3100 perpetuity 4,250.00 Price at 7% 121071 508.35 712.398 131.37 10857 Percentage — Change 6.75% 975 476 3219 1429 7-8 The rate of retum is approximately 15.03%, found with 2 cakulator using the flowing inputs: N= 6; V'= 1000; PMT = 140; FV. 1000; IR = ? Solve for I/¥R = 15.03%. Despite a 15% retum on the bonds, investors are net likely to be happy that they were called. Because the bonds have been called, this indicates that interest rates have fallen sufficiently that the YTC isless than the YTM. (Since they were originally sold at par, the YTM at issuance= 14%.) Rates aresufficently low to jusily the call. Now investors must remvest their funds in a much lower 2. Vy= $1,104 Change PV: 1. Yes. Ata price of $328, the yield to maturity, 15%, is greater than your required rate of rourn of 12%, If your tequred fate of return were 12%, you should be wang to buy the bond at any pce below $208 8, 710 a. Salving for vs: N= 9, Pv =-901.40, Pa = 80, FY = 1000 Ive = vm = 9.69119. 1b. The curent yo is defined as the annual coupon payment divided bythe current price. (Cy = $80/5901.40 ~ 8.875%, ‘ected capital gains yd can be found asthe diference between YTH and the cutent ye. (cGy = YTM cy = 9.601% - 8.875% = 0.816%. Yu can save for the capital onns yield by fst finding the expected price nest yea. Aeenatvely, N= 5, WR ~ 9.911, aT ~ 80,FV~ 1000 PV = "$908.76. Ve = $908.76. Hence, the captal ans yield isthe percent price appreciation over the nest year. cay = (P,—Pa)/P, = ($908.76 ~ $901.40)/$901.40 = 0.816%. ‘c._As rates change they wil cause the end-of-year price to change and thus the realized capital ‘gains yield to change. As ares the realized return to investors wil fer from the YTH. TALL a. Using a financial calculator, input the following to solve for YTM: N= 48, Pv = -1100, PHT = 60, FV = 1000, and solve for YTM = INR = 5.135%. However, this sa periodic rate. The nominal YTC = 5.074896(2) = 10.1495% ~ 10.15%. ‘So the bond is likely to be called, and investors are mast likely to earn a 10.15% yield. The current yield = §120/$1,100 = 10.91%. The current yd wil remain the same; however, iF the bond i cle the YTC reflects the total return (rather than the YTH) so the captal gains yell wil be déferen. YIM = Current yield + Capital gain (os) yield 10.27% = 10.91% + Captal los yl 1.69% = Capital oss ye ‘This i the capital loss yield ifthe YTM i expected.9-1 Dy = $1.50; a1. 7%; a5 = 5%; Dy through D._ Dy = DXi + g,) = $1.50(1.07) = $1,6050. De = DAI + 9:)(4 + 2) = $1.50(1.07)" = $1.7174. Dp = D&I + 9:)(4 + a2)(1 + os) = $1.50(1.07)" = $1.8376. De = DAI + G.)(4 + 93) + GaN + a4) = $1.50(1.077°(1.05) = $1.9294. Ds = DAL + G:)(4 + a2)CL + eaXL + a9)? = $1.50(1.07)°1.05) = $2.0259. 9-3 Py = $20; Dy = $1.00; g = 6%; B, = 7; a(t + a) = $20(1.06) = $21.20. $3.00(4.00) + 0.06, a o 1.89 3780 = T30- 0.05 “The horizon, or terminal, valve the value atthe hortzon date of all dividends expected thereafter. In this problem itis caloated as follows: (The firm's intrinsic value is calculated asthe sum ofthe present value of al dividends during the supernormal growth pered plus the present value ofthe terminal value. Using your financial calculator, enter the folowing inputs: CFy= 0, CF, = 1.50, CF, = 1.80 + 37.80 = 39.60, JR = 10, and then solve for NPV = $34.09. 9-5 Thefirm's foe cash flaw is expected to grow ata constant rate, hence we can apply a constant grant formula to determine the total value of the firm. Frm value = FOF /(WACC 9) To find the value of an equity claim upon the company (share of stock), we must subtract out the rmatket value of debt and prefered stock. This rm happens tobe entirely equty funded, and ths step is unnecessary. Hence, to find the value ofa share of stock, we dade equity value (orn ths ase fim value) by the numberof shares outstanding. Equity value per share |= Equity value/Shares outstanding $n. 00,00, 000 Each shave of common stackis worth $60, acocing to the corporate valation made! 9-6 0, = $5.00; V,= $60;,=?