Based on your answers in (a) and (b), why would you ever want to issue the To an

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Based on your answers in (a) and (b), why would you ever want to issue the To answer, calculator the firm's tax outflows for the first year sender the two different scenarios. Finding the Maturity (LO_2) You've just found a 10 percent coupon bond on the market that sells for par value. What is the maturity can this bond? Real Cash Flows(LO3) You want to have $1.5 million in real dollars in an account which you retire in 40 years. The nominal return on your investment is 11 percent and the inflation rate is 3.8 percent. What real amount must you deposit each year to achieve your goal? Components of Bond Returns(IO_2) Bond P is premium bond with a 12 percent coupon, Bond D is a 6 percent coupon bond currently selling at a discount, Both bonds make annual payments, have a YTM of 9 percent, and have five years to maturity. What is the current yield for bond P? For bond D? Explain your answers and the interrelationships among the YTM, coupon rate, and capital gains yield. Holding Period Yield (LO_2) The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period yield(HPY). Suppose that today you buy an 7 percent annual coupon bond for $1,060. The bond has 10 years to maturity. What rate of return do you expect to earn on your investment? Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. What price will your bond sell for? What is the HPY on your investment? Compare this yield to the YTM when you first brought the bond. Why are they, different? Valuing Bonds(LO_2) The Metchosin Corporation has two different bonds currently outstanding. Bond M has a face value of $20, 000 and matures in 20 years. The bond makes no payments for the six years, then pays $1, 100 every six months over the subsequent eight years, and finally pays $1,400 every six months over he last six years, Bond N also has a face value of $20, 000 and a maturity of 20 years; it makes no coupon payments over the life of the bond. If the required return on both these bonds is 7 percent compounded semiannually, what is the current price of bond M? Of bond N? Tuxedo Air's Expansion plans with a Bond Issue and jack Rodwell, the owners of Tuxedo Air, have to expand their operations. They instructed their financial analyst, Ed Cowan, to enlist an under help sell $35 million in new 10-year bonds to finance Chris has entered into discussion with Suzanne underwriter from the firm of Raines and Warren, bond features Tuxedo Air should consider and rate the issue will likely have. The bond features, he is uncertain The security of the bond- that is, whether the bond has collateral. The seniority of the bond. The presence of a sinking fund. A call provision with specified call dates and call prices. A deferred call accompanying the call provision. A Canada plus call provision. Any positive covenants. Also, discuss several possible positive covenants Tuxedo Air might consider. Also discuss several possible

Explanation / Answer

Let the Face Value of both bonds be equal to $1000 each.
Hence the annual coupon of bond P= $120 (i.e 12% of 1000)
and the annual coupon of bond D= $60 (i.e 6% of 1000)

To find the capital gains yield and the current yield, we need to find the price of the bond. The current price of Bond P and the price of Bond P in one year is:

Bond Price = Coupon Value* PVIFA of YTM upto n years + Issue Price * PVIF of YTM upto n years

P: P0= $120(PVIFA9%,5) + $1,000(PVIF9%,5) = $1,116.69

P1= $120(PVIFA9%,4) + $1,000(PVIF9%,4) = $1,097.19

Current yield= Annual Coupon/Market Price of the bond

Current yield = $120 / $1,116.69 = .1075 or 10.75%

The capital gains yield is:

Capital gains yield = (New price – Original price) / Original price

Capital gains yield = ($1,097.19 – 1,111.69) / $1,116.69 = –.0175 or –1.75%

The current price of Bond D and the price of Bond D in one year is:

D: P0= $60(PVIFA9%,5) + $1,000(PVIF9%,5) = $883.31

P1= $60(PVIFA9%,4) + $1,000(PVIF9%,4) = $902.81

Current yield= Annual Coupon/Market Price of the bond

Current yield = $60 / $883.81 = .0679 or 6.79%

Capital gains yield = ($902.81 – 883.31) / $883.31 = +.0221 or +2.21%

if interest rate remain unchanged, premium bonds pay high current income while having price depreciation as maturity nears;discount bonds do not pay high current income but have price appreciation as maturity nears. For either bond, thetotal return is still 9%, but this return is distributed differently between current income and capital gains

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