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Chapter 5: 12BP (page 529)

Assume a zero-coupon bond that sells for \(403 and will mature in 10 years at \)1,250. What is the effective yield to maturity? (Compute PVIF and go to Appendix B for the 10-year figure to find the answer, or compute FVIF and go to Appendix A for the 10-year figure to find the answer. Either approach will work.)

Short Answer

Expert verified

The yield to maturity is computed as 11.99%

Step by step solution

01

Definition of bond

Bonds are defined as financial instruments which are issued by a big corporation and government companies in the form of debt to raise the funds to meet their capital requirements.

02

Computation of yield to maturity

FV=PV×(1+r)n1,250=403×(1+r)nr=11.99%

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Most popular questions from this chapter

The efficient market hypothesis is interpreted in a weak form, a semi strong form, and a strong form. How can we differentiate its various forms?

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f. Comment on management’s perception of market efficiency (the viewpoint of the financial officer).

The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows:

In \( millions

In \) millions

Current assets

\(70

Current liabilities

\)30

Fixed assets

\(70

Long-term liabilities

\)30

Total liabilities

\(60

Stockholder’s equity

\)80

Total assets

\(140

Total stockholder’s equity and liabilities

\)140

The footnotes stated that the company had $14 million in annual capital lease obligations for the next 20 years.

e. In an efficient capital market environment, should the consequences of SFAS No. 13, as viewed in the answers to parts c and d, change stock prices and credit ratings?

Using the information in Problem 3, assume that American Health Systems’ 1,700,000 additional share can only be issued at $18 per share.

a. Assume that American Health Systems can earn 6 percent on the proceeds. Calculate earnings per share.

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