Nedo Enterprises originally sold bonds in 2011 with a 15 year maturity, $1000 pa
ID: 2773070 • Letter: N
Question
Nedo Enterprises originally sold bonds in 2011 with a 15 year maturity, $1000 par, 6% coupon paying annual interest. It is now 2015 and 4 years later. Bonds of similar risk selling at par know have a 5% coupon rate.
a. What price would bond investors be willing to pay for a Nedo Enterprise bond today? Is this at a premium or discount?
b. What if the current market coupon rate was 9%-what price would bond investors be willing to pay for a Nedo bond? Is this at a premium or discount?
Beck Industries bond has a current market price of $1060, 7% coupon, $1000 par, 10 years maturity.
a What is the yield to maturity?
b So, do similar risk bonds being issued today (at par) have a coupon rate higher or lower than Beck’s?
An investment has a beta of 1.0. The risk free rate is 2% and current market return is 8%?
a What is the required return?
b if you were able to guarantee a return of 7% on this investment, should you go forward with the investment?
c What is the required return if beta is .8 instead? if you were able to guarantee a return of 7% on this investment, should you go forward with the investment?
Explanation / Answer
Answer: Calculation of the YTM:
current market price =$1060
I=7%
PAr value=$1000
n=10 years
YTM=6.18% (Using On excel)
A bond sells at a premium to par value, then: Coupon Rate > Current Yield > YTM.
In this situation coupon rate is greater than YTM so,similar risk bonds being issued today.
Answer:a Calculation of the required rate of return
Ke=Rf+Beta(ER(m)-Rf)
=2%+1.0(8%-2%)
=8%
Answer:b if you were able to guarantee a return of 7% on this investment, than this return is less than required rate of return so, you should not go forward with the investment.
Answer:c Calculation of the required rate of return
Ke=Rf+Beta(ER(m)-Rf)
=2%+0.8(8%-2%)
=6.8%
if you were able to guarantee a return of 7% on this investment, than this return is greater than required rate of return so, you should go forward with the investment.
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