Exploration 9.

1 solutions
1. Hoping to raise approximately $1 million. Coupon payments are $10/bond or $10,000
every six months.
2. A discount because the yield rate was larger than the coupon payments.
3. $943.99 each or $943,990 after selling 1000 of them.
4. $56.01
5. a. $19.42/bond, b. $961.17 for the lump sum, c. $980.59 is the book value of the bond
6. The bond was issued at a discount so its book value will slowly increase until it reaches
the redemption price. This also makes sense because the coupon payments aren’t
enough to cover the accrued interest on the ‘loan’
7.

Table 9.X – Book values of the bond every 6 months from issue until redemption
Half-year Coupon payment Book value
0 - $943.99
1 10 $952.87
2 10 $961.92
3 10 $971.16
4 10 $980.59
5 10 $990.20
6 10 $1000

8. $18.88
9. $8.88
10. $943.99+$8.88 = $952.87
11. Interest=$19.06; Accumulation of discount = $9.06; Book value = $952.87+$9.06 =
$961.92
Exploration 9.2 solutions
1. Refinance the loan
2. Some of the factors could include: Better market interest rates, more solid financial
footing for the company, time/expense of calling the bonds, whether or not the debt is
needed any longer.
3. $10 coupon in 6 months ($10,000 total); $10 coupon in one year ($10,000 total); $1000
redemption in one year ($1,000,000 total)
4. $1020/bond (or $1,020,000 total today).
5. $996.07/bond. The bond is selling at a discount because the 2% semi-annual coupons
are still less than the yield rate of $2.4% nominal semi-annually.
6. The company will need to sell approximately 1,024 bonds
7. The company will need to make a $10 coupon payment in 6 months ($10,240 total cost);
The company will need to make another $10 coupon payment in 12 months ($10,240
total cost), along with the redemption expense of $1,000 ($1,024,000 total cost).
8.
Table 9.X. Out of pocket costs for the company over time – call premium $20
Time Keep original bond Refinance Savings (Loss)
(1,000 bonds sold) (1,024 bonds sold)
5rd half year $10,000 $10,240 ($240)
6th half year $1,010,000 $1,034,240 ($24,240)
Total $1,020,000 $1,044,480 (24,480)

9. Based on the fact that the company will lose money the company should not reissue the
bonds in this scenario.
10. $1,011.93/bond issue price. The company will need to sell approximately 993 bonds to
cover the cost of calling the original bond.
11.
Table 9.X. Out of pocket costs for the company over time – call premium $5;
nominal yield rate 0.8%
Time Keep original bond Refinance Savings (Loss)
(1,000 bonds sold) (993 bonds sold)
5rd half year $10,000 $9,930 $70
6th half year $1,010,000 $1,002,930 $7,070
Total $1,020,000 $1,012,860 $7,140

12. Reissuing the bonds will save the company $7,140 with the $5 call premium and 0.8%
nominal yield rate, and so it is now advantageous for the company to reissue the bonds.

Exploration 9.3 solutions

1. Bond A is $1000; Bond B is $962.81.
2. The market place determines yield rates, so if each bond is viewed as a similar ‘risk’
(same grade) than the market must be anticipating that interest rates will change over
time
3. 3% because the one-year spot rate is the rate on money invested now for 1 year – which
is the case for this one year bond
4. Larger because the yield on the two-year bond is larger
5. 5.03%
6. $906.49
7. Because it doesn’t include the coupons
8. $909.02
9. 0.06433
10. Because the bulk of the cash flow is occurring in year three
11. 0.03. This is also s1.
12. 𝑓1,2 = 7.1%. This is the market anticipated yield rate for money invested one year from
now for one year.
13. 𝑓2,3 = 9.6%. This is the market anticipated yield rate for money invested two years from
now for one year.
14. The market seems to be anticipating significant economic growth over the next few
years, with the pace of growth accelerating over time.