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Chapter 5: 11BP (page 529)

A 17-year, \(1,000 par value zero-coupon rate bond is to be issued to yield 7 percent.

a. What should be the initial price of the bond? (Take the present value of \)1,000 for 17 years at 7 percent.)

b. If immediately upon issue, interest rates dropped to 6 percent, what would be the value of the zero-coupon rate bond?

c. If immediately upon issue, interest rates increased to 9 percent, what would be the value of the zero-coupon rate bond?

Short Answer

Expert verified

(a) The initial price of the bond is computed as $316.57

(b) The price of the bond at the interest of 6% is $371.36

(c) The price of the bond at the interest of 9% is $231.07

Step by step solution

01

Computation of Initial Price of bond

InitialPriceofbond=ParValue×1(1+r)t=1,000×1(1+0.07)17=$316.57

02

Computation of price of the bond at interest rate of 6%

Priceofbond=ParValue×1(1+r)t=1,000×1(1+0.06)17=$371.36

03

Computation of price of the bond at an interest rate of 6%

Priceofbond=ParValue×1(1+r)t=1,000×1(1+0.09)17=$231.07

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Most popular questions from this chapter

Midland Corporation has a net income of \(19 million and 4 million shares outstanding. Its common stock is currently selling for \)48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of \(21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for \)44 per share with a spread of 4 percent.

b. Why is the investment banker selling the stock at less than its current market price?

Question: The Bowman Corporation has a \(18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new \)18,000,000 issue is \(530,000, and the underwriting cost on the old issue was \)380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.

a. Calculate the present value of total outflows.

Walton and Company is the managing investment banker for a major new underwriting. The price of the stock to the investment banker is \(23 per share. Other syndicate members may buy the stock for \)24.25. The price to the selected dealers group is \(24.80, with a price to brokers of \)25.20. Finally, the price to the public is $29.50.

  1. If Walton and Company sells its shares to the dealer group, what will the percentage return be?
  2. If Walton and Company performs the dealer’s function also and sells to brokers, what will the percentage return be?
  3. If Walton and Company fully integrates its operation and sells directly to the public, what will its percentage return be?

The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of \(6,910,000 in the current year. The company is considering the issuance of 1 million additional shares that can only be issued at \)30 per share.

a. Assume that Hamilton Corporation Company can earn 7.0 percent on the proceeds. Calculate the earnings per share.

b. Should the new issue be undertaken based on earnings per share?

What was the purpose of the Sarbanes-Oxley Act of 2002?
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