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Question
Submitted by barzki on Wed, 2013-05-22 18:23
due on Sun, 2013-05-26 18:17
answered 2 time(s)
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principles of fincnace week 7
5
week 7

Finance

1.  Assume Mr. Davis can buy either a $10,000 corporate bond yielding 10% or a municipal bond yielding 7%. Assume risk is constant. Assume also that his Federal tax rate will be 28% and his State tax rate 7% and that the municipal bond is exempt from both types of income taxes.  Which should he buy, if the yield and tax consequences are the only variables?

 

2.  A bond has the following terms:

Principal amount $1,000
Semi-annual interest $50
Maturity 10 years

(When asked for a % yield, round yields to nearest tenth of a percent, such as 10.1 %.)

 

  • What is the bond's price if comparable debt yields 12%?
  • What would be the price if comparable debt yields 12% and the bond matures after 5 years?
  • What are the current yields and yields to maturity if a. and b.?
  • What would be the bond's price in a. if interest rates declined to 8%? What if the bond matures after 5 years?
  • What are the current yields and yields to maturity in d.?
  • What two generalizations may be drawn from the above price changes?

3.  You purchase a high-yield, junk bond for $1,000 that pays $140 annually. After buying the bond, yields decline and you are able to reinvest the interest at only 9 percent. You reinvest all the interest payments.  How much will you have when the bond is retired after 12 years? What was the annual return you earned on this investment?

 

4.  Determine the current market prices of the following $1,000 bonds if the comparable rate is 10% and answer the questions.

    • XY 5 ¼ percent, with interest paid annually for 20 years.
    • AB 14 percent, with interest paid annually for 20 years.
  • Which bond has a current yield that exceeds the yield to maturity?
  • Which bond may you expect to be called? Why?
  • If CD, Inc. has a bond with a 5 ¼ percent coupon and a maturity of 20 years but which was lower rated, what would be its price relative to the XY, Inc. bond? Explain.
Answer
Submitted by Abhishek Jain on Wed, 2013-05-22 18:49
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Week7 Solution

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file1.xls preview (464 words)

xxxxxxx x

x
xxxxxx xxxxx xxxx answer xxxxxxxx should buy xxx municipal xxxx xxxxxxxx xx xxxxxxx his xxxxx tax return would be higher. With xxx xxxxxxxxx bond he xxxxx earn $1000 x xxxx xxx xxxx to xxx $280 in federal xxx xxx xxx in xxxxx tax and xx left with xxxx a year instead xx $700 a year from the municipal xxxxx

Problem 2

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
Part a.
xxxx 6%
xxxx 20
pmt$50
xxxxxxxx
type 0
PV xxxxxxxxx
xxxx b.
xxxx xx
Nperxx
xxx$50
xx$1,000
xxxx x
PV ($926.40)
Part c.
Current xxxxx for a.5.6%
Current xxxxx xxx b. 5.4%
Yield xx xxxxxxxx
Nper 20
xxxxxx
PV xxxxxxxxx
FVxxxxxx
xxxx x
Semi-Annual xxxxxx Rate 6.00%
Annual xxxxxx xxxx 12.00%
Nper10
Pmt$50
PVxxxxxxxxx
xx$1,000
Type0
Semi-Annual xxxxxx xxxx 6.00%
Annual Return xxxx xxxxxx
xxxx d.
xxxx4% 4%
Nperxx 10
xxxxxxxxx
xx $1,000 $1,000
xxxx x0
xx($1,135.90)($1,081.11)
xxxx e.
Current yield xxx d. xx 10 xxxxx4.4%
xxxxxxx yield for d. at x xxxxx xxxx
xxxx xx
Please

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Answer
Submitted by mhs on Mon, 2013-11-18 09:13
teacher rated 16 times
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Solution_Principles of week 7 (100% accurate)

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xxxxxxxxxxxxxxxxxxxx

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xxxxxxx x

xxxxxxxxxx
Corporate xxxx xxxxxxxxx xxxx
Face Value$10,000 $10,000
Yield 10% xx
Federal tax ratexxx 0.0
xxxxx tax xxxx xx xxx
xxxxx xxx interest xxxxxxxxxxxxx $700.00
Please enter your answer xxxxxxxxxx xxxxx xxxxxx xxx Municipal Bond xxxxx xxxxx tax return on xxxxxxxxx Bond xx higher xxxx xxxx xx Corporate xxxxx

xxxxxxx x

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
Part a.
Rate xx
xxxxxx
xxxxxx
xx$1,000
type 0
xx $885.30
xxxx b.
Ratexx
xxxx10
pmt $50
xxxxxxxx
typex
PV $926.40
xxxx xx
Current xxxxx for a. xxxxx
xxxxxxx xxxxx for b. 10.8%
xxxxx xx xxxxxxxx
xxxx20
xxx$50.00
PV xxxxxxx
FVxxxxxxxxx
Type 0
Semi-Annual xxxxxx Ratexxxxx
Annual xxxxxx Rate 11.80%
xxxxxx
xxx xxxxxx
xx $926.40
FVxxxxxxxxx
Typexxxxx
Semi-Annual xxxxxx Ratexx
xxxxxx xxxxxx xxxxxxx
Part xx
Ratexx4%
xxxx xx 10
xxx xxx xxx
fv$1,000 $1,000
xxxx00
PV $1,135.90 xxxxxxxxx
xxxx e.
xxxxxxx xxxxx for xx xx xx years 8.8%
xxxxxxx yield for

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