# finance data bank

.doc#_edn1″ title=””>[i]. You are the owner of 100

bonds issued by Euler, Ltd. These bonds

have 8 years remaining to maturity, an annual coupon payment of $80, and a par

value of $1,000. Unfortunately, Euler is

on the brink of bankruptcy. The creditors, including yourself, have agreed to a

postponement of the next 4 interest payments (otherwise, the next interest

payment would have been due in 1 year).

The remaining interest payments, for Years 5 through 8, will be made as

scheduled. The postponed payments will

accrue interest at an annual rate of 6 percent, and they will then be paid as a

lump sum at maturity 8 years hence. The

required rate of return on these bonds, considering their substantial risk, is

now 28 percent. What is the present

value of each bond?

a. $538.21

b. $426.73

c. $384.84

d. $266.88

e. $249.98

.doc#_edn2″ title=””>[ii]. Marie Snell recently

inherited some bonds (face value $100,000) from her father, and soon thereafter

she became engaged to Sam Spade, a University

of Florida marketing

graduate. Sam wants Marie to cash in the

bonds so the two of them can use the money to “live like royalty” for

two years in Monte Carlo. The 2 percent annual coupon bonds mature on January 1, 2024, and it is

now January 1, 2004. Interest on these bonds is paid annually on

December 31 of each year, and new annual coupon bonds with similar risk and

maturity are currently yielding 12 percent.

If Marie sells her bonds now and puts the proceeds into an account which

pays 10 percent compounded annually, what would be the largest equal annual

amounts she could withdraw for two years, beginning today (i.e., two payments,

the first payment today and the second payment one year from today)?

a. $13,255

b. $29,708

c. $12,654

d. $25,305

e. $14,580

.doc#_edn3″ title=””>[iii]. Due to a number of lawsuits

related to toxic wastes, a major chemical manufacturer has recently experienced

a market reevaluation. The firm has a

bond issue outstanding with 15 years to maturity and a coupon rate of 8

percent, with interest paid semiannually.

The required nominal rate on this debt has now risen to 16 percent. What is the current value of this bond?

a. $1,273

b. $1,000

c. $7,783

d. $ 550

e. $ 450

.doc#_edn4″ title=””>[iv]. JRJ Corporation recently

issued 10-year bonds at a price of $1,000. These bonds pay $60 in interest each

six months. Their price has remained

stable since they were issued, i.e., they still sell for $1,000. Due to additional financing needs, the firm

wishes to issue new bonds that would have a maturity of 10 years, a par value

of $1,000, and pay $40 in interest every six months. If both bonds have the same yield, how many

new bonds must JRJ issue to raise $2,000,000 cash?

a. 2,400

b. 2,596

c. 3,000

d. 5,000

e. 4,275

.doc#_edn5″ title=””>[v]. Assume that you are

considering the purchase of a $1,000 par value bond that pays interest of $70

each six months and has 10 years to go before it matures. If you buy this bond, you expect to hold it

for 5 years and then to sell it in the market.

You (and other investors) currently require a nominal annual rate of 16

percent, but you expect the market to require a nominal rate of only 12 percent

when you sell the bond due to a general decline in interest rates. How much should you be willing to pay for

this bond?

a. $ 842.00

b. $1,115.81

c. $1,359.26

d. $ 966.99

e. $ 731.85

.doc#_edn6″ title=””>[vi]. Assume that a 15-year,

$1,000 face value bond pays interest of $37.50 every 3 months. If you require a nominal annual rate of

return of 12 percent, with quarterly compounding, how much should you be

willing to pay for this bond? (Hint: The

PVIFA and PVIF for 3 percent, 60 periods are 27.6748 and 0.1697, respectively.)

a. $ 821.92

b. $1,207.57

c. $ 986.43

d. $1,120.71

e. $1,358.24

.doc#_edn7″ title=””>[vii]. Your client has been offered

a 5-year, $1,000 par value bond with a 10 percent coupon. Interest on this bond is paid quarterly. If your client is to earn a nominal rate of

return of 12 percent, compounded quarterly, how much should she pay for the

bond?

a. $ 800

b. $ 926

c. $1,025

d. $1,216

e. $ 981

.doc#_edn8″ title=””>[viii]. In order to accurately assess

the capital structure of a firm, it is necessary to convert its balance sheet

figures to a market value basis. KJM Corporation’s balance sheet as of today, January 1, 2004, is as

follows:

Long-term debt (bonds, at

par) $10,000,000

Preferred stock 2,000,000

Common stock ($10 par) 10,000,000

Retained earnings 4,000,000

Total debt and equity $26,000,000

The

bonds have a 4 percent coupon rate, payable semiannually, and a par value of

$1,000. They mature on January 1, 2014. The yield to maturity is 12 percent, so the

bonds now sell below par. What is the

current market value of the firm’s debt?

a. $5,412,000

b. $5,480,000

c. $2,531,000

d. $7,706,000

e. $7,056,000

.doc#_edn9″ title=””>[ix]. You just purchased a

15-year bond with an 11 percent annual coupon.

The bond has a face value of $1,000 and a current yield of 10 percent.

Assuming that the yield to maturity of 9.7072 percent remains constant, what

will be the price of the bond 1 year from now?

a. $1,000

b. $1,064

c. $1,097

d. $1,100

e. $1,150

.doc#_edn10″ title=””>[x]. Cold Boxes Ltd. has 100

bonds outstanding (maturity value = $1,000). The nominal required rate of

return on these bonds is currently 10 percent, and interest is paid

semiannually. The bonds mature in 5

years, and their current market value is $768 per bond. What is the annual coupon interest rate?

a. 8%

b. 6%

c. 4%

d. 2%

e. 0%

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