Finance- ABC Co. is planning to issue bonds that have a face value of $100 million

| January 31, 2017

Question
1. 1. ABC Co. is planning to issue bonds that have a face value of $100 million, a coupon rate of 5% paid semi-annually, and a maturity of 20 years.

a. a. What are the $-values and timing of the promised payments ABC Co. will make to the holders of these bonds?

a. b. If investors demand an interest rate of 4% to lend money to ABC Co., how much money can ABC Co. expect to raise by issuing and selling these bonds?

1. 2. DEF Inc. bonds mature in 3 years, have a face value of $1,000, and a coupon rate of 4% paid annually. If the interest rate for these bonds is 3%:

a. a. What is the price of this bond today (i.e., at t = 0)? What do you expect the price of this bond will be in one year (i.e., at t = 1)? In two years (i.e., at t = 2)?

a. b. What is the expected return for an investor who buys this bond at t = 0 and holds it until t = 1?

a. c. What is the expected return for an investor who will buy this bond at t = 1 and hold it until t = 2?

a. d. What is the expected return for an investor who will buy this bond at t = 2 and hold it until it matures at t = 3?

1. 3. GHI Inc. bonds mature in 5 years, have a face value of $1,000, and a coupon rate of 3% paid annually. These bonds are currently priced at $1,025, which implies that these bonds have a yield-to-maturity (YTM) of approximately 2.46%.

If you purchase one of these bonds today and one year from now these bonds have

a.

b.a. YTM of 2.7%, what is your one-year holding period return from this investment?

4. 4. JKL Inc. bonds mature in 25 years, have a face value of $1,000, and a coupon rate of 3% paid annually. These bonds are currently priced at $1,100, which implies that these bonds have a yield-to-maturity (YTM) of approximately 2.46%.

If you purchase one of these bonds today and one year from now these bonds have

a.

b.a.YTM of 2.7%, what is your one-year holding period return from this investment?

4. 5. Refer to questions #3 & #4. Briefly explain why two bonds that have an equal YTM today, and then again have an equal YTM one year later, have different one-year holding period returns.

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