6) C onsider two bonds, A and B. Both bonds interest of $120 annually. Bond yiel

Question

6) C onsider two bonds, A and B. Both bonds interest of $120 annually. Bond yields to maturity on the two bonds change from 12% to 1 presently are selling at their par value of $1,000. Each pay A will mature in 5 years while bond B will mature in 6 years. If the 4% both bonds will increase in value but bond A will increase more than bond B both bonds will increase in value but bond 8 will increase more than bond A a) b) th bonds will decrease in value but bond A will decrease more than bond 8 d) both bonds will decrease in value but bond B will decrease more than bond A 7) A bond ha s a coupon of 6%, pays interest annually, has a par value of $1,000, matures in 5 years, and is selling today at a $924.75. What is the current vield for this bond? a) 6.00% b) 6.49% c) 6.73% d) 7.88% 8) What is the yield to maturity (YTM) of the bond in the question above? a) 6.00% b) 6.49% c) 6.73% d) 7.88% 9) Taylor's Men's Wear has a debt-equity ratio of 42 percent, sales of $749,000, net income of $41,300, and total debt of $206,300. What is the return on equity? a) b) c) 7.79% 8.41% 8.74% d) 9.09% Page 2

Explanation / Answer

6) Let's calculate change in price

Currently both bonds are selling at par means YTM of both bonds is equal to intrest rate = 12%

Nof if YTM chnages to 14%

Price of bond = Interest*PVIFA(r%,n) + redemption value*PVIF(r%,n)

For bond A

Price = 120*PVIFA(14%,5years) +1000*PVIF(14%,5th year)

=120*3.433 +1000*0.519

=411.9697+519

=930.97

For Bond B

Price = 120*PVIFA(14%,6years) + 1000*PVIF(14%,6th year)

120*3.89 + 1000*0.456

=466.64+456

=922.64

Thus

Ans D) Both bond will decrease in value but bondd B wll decrease more than bond A

7) current yield = interest/Price of bond

=(1000*6%)/924.75

=60/924.75

=6.49%

Ans b) 6.49%

8) YTM = {Interest + [(Face value - current price)/n] }/ (face value+current price/2)

{60 + [(1000 - 924.75)/5] }/ (1000+924.75/2)

=60+15.05/962.375

=75.05/962.375

=0.07788

I.e 7.788%

Thus ans d) 7.88%

9) First let us find value of equity

Debt/equity = 42%

=206300/equity = 0.42

equity = 206300/0.42

=491190.47

Return on equity = Net income/equity

=41300/491190.47

=0.0841

Ie 8.41%

Ans b) 8.41%

Related Questions

Navigate

• Browse (All)
• Browse 6
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.