6) On march 13th, 2013 the spread between the yeild to maturity of a Baa rated c
ID: 2646240 • Letter: 6
Question
6)
On march 13th, 2013 the spread between the yeild to maturity of a Baa rated corporate bonds and the 5 year treausary was
a) 100
b)200
c)400
d)30
14) Maagers are going to borrow finance 50% of the value of new assets. The rest will be financed with equity. They have decided that the correct discount rate to vathe project is the average of the firms estimaed 15% cost of equity ad the after tax cost of debt. The pre-tax cost of the firms debt is the yeild to maturity of bonds the firm is going to issue. The terms of the bonds are:
settlement 5/5/14
maturity 5/5/2024
rate 10%
pr 100
redemption 100
frequency 2
basis 0
These terms are from the excel function yield
The firms marginal tax rate is 25%
The discount rate the firm uses should be
a)10.25%
b)11.25%
c)10.75%
d)7.5%
19) Managers are going to borrow finance 50% of the value of new assets. The rest will be financed with equity. They have decided that the correct discount rate to vathe project is the average of the firms estimaed 15% cost of equity ad the after tax cost of debt. The pre-tax cost of the firms debt is the yeild to maturity of bonds the firm is going to issue. The terms of the bonds are
Settlement 5/5/2014
maturity 5/5/2014
rate 10%
pr 90
redemotion 100
frequency 2
basis 0
These terms are from the excel function yeild
The firms marginal tax rate is 50%
The discount rate the firm uses should be
a)7.54%
b)10.43%
c)9.82%
d)9.5%
24) rate 13%
nper 30
pmt $800
fc 0
Based on the above information the present value of the payment pmt stream is $5,996.52
True
false
25) A bond has a coupon of 6%. It has a face value of $100. It pays interest semianually. The bond was issued on march 18th, 2013. This settlement date is march 21, 2013. The maturity date is 3/23/23. The first interest payment is june 18th 2013. The redemption of the bond is $100. The bond is currently selling for 110% of face valye. The yield to maturity of the bond is
a)3.653%
b)9.467%
c)6%
D)4.733%
26) The bond with the cusip 855244ad1 is currently tradaing at a premiuim.
true
false
Explanation / Answer
6) b
14) b
Computation of after tax debt cost = debt interest before tax (1 - tax rate)
= 15 (1 - 0.25)
= 7.5
Discount rate that firm should use = (equity cost x weightage of equity + debt cost x weightage of debt)
= (15 x 0.5 + 7.5 x 0.5)
= 11.25
19) c
24) True
Present value = PMT (1- (1+i)-n) / i
i= interest rate
n = number of compounding periods
25) d
26) True
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