a) Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had
ID: 2810875 • Letter: A
Question
a) Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a 30-year life when issued and the annual interest payment was then 15 percent. This return was in line with the required returns by bondholders at that point in time as described below:
Assume that 10 years later, due to good publicity, the risk premium is now 2 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 20 years remaining until maturity.
Compute the new price of the bond. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)
b) The Pioneer Petroleum Corporation has a bond outstanding with an $60 annual interest payment, a market price of $880, and a maturity date in eight years. Assume the par value of the bond is $1,000.
Find the following: (Use the approximation formula to compute the approximate yield to maturity and use the calculator method to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
c) Harold Reese must choose between two bonds:
Bond X pays $85 annual interest and has a market value of $780. It has 12 years to maturity.
Bond Z pays $95 annual interest and has a market value of $800. It has five years to maturity.
Assume the par value of the bonds is $1,000.
a. Compute the current yield on both bonds. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
b. A drawback of current yield is that it does not consider the total life of the bond. For example, the approximate yield to maturity on Bond X is 11.90 percent. What is the approximate yield to maturity on Bond Z? The exact yield to maturity? (Use the approximation formula to compute the approximate yield to maturity and use the calculator method to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
Boles Bottling Co. has issued rights to its shareholders. The subscription price is $64 and six rights are needed along with the subscription price to buy one of the new shares. The stock is selling for $77 rights-on.
a. What would be the value of one right? (Do not round intermediate calculations and round your answer to 2 decimal places.)
b. If the stock goes ex-rights, what would the new stock price be? (Do not round intermediate calculations and round your answer to 2 decimal places.)
Explanation / Answer
After 10 years the return required is as below:
n=20
FV=1000
I/Y=12
PMT=150
Using financial calculator:
CPT PV=$1,224.08
b)
Real rate of return 5 % Inflation premium 5 % Risk premium 2 % Total return 12 %Related Questions
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