3.4 Stock & Bond Valuation - Solutions (1)

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3.4 Stock & Bond Valuation - Solutions (1)


Pages:
10
School:
University of Texas at Austin
Course:
Fin 320f - Foundations of Finance
Foundations of Finance Documents

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End of period: 0123456…14151617181920 FIN 320F Foundations of Finance 3.4 Stock & Bond Valuation - Solutions 1. A company issued 10,000 5-year bonds. Each bond has a par value of $1,000 and bears a coupon rate of 4.5%. On the day the bonds were issued, the prevailing market interest rate was 4.5% a) What is the coupon payment amount that each bondholder will receive every six months? Coupon interest payment = (M × C) ÷ m = ($1,000 × 0.045) ÷ 2 = $22.50 b) How much cash must the company pay in total coupon payments every six months? $22.50 per bond × 10,000 bonds = $225,000 in total interest payments c) On the day they were originally issued, did the bonds sell at par, above par, or below par? The coupon rate and the market rate for similar bonds are both 4.5%. Thus, the bonds sold at par. Each bond sold for $1,000. d) How much total cash did the company receive on the day it issued the bonds? Each bondholder paid $1,000 per bond. The company received $1,000 per bond × 10,000 bonds = $10,000,000. e) How much total cash must the company pay (for the principal) on the day the bonds mature? When the bonds mature in 5 years, the company must pay back the entire principal (also called par value) of $10,000,000. Each bondholder will get their $1,000 back. 2. A company issued 10-year bonds with a $1,000 par value and a 5.75% coupon rate. On the day the bonds were issued, the prevailing market rate for bonds of this type was 6.25%. a) What is the coupon payment amount that each bondholder will receive every six months? Coupon interest payment = (M × C) ÷ m = ($1,000 × 0.0575) ÷ 2 = $28.75 b) On the day they were originally issued, did the bonds sell at par, above par, or below par? The coupon rate is less than the investors’ required rate of return. That is, the coupon rate is less than the prevailing market rate for this type of bond. As a result, investors insist on paying less than par value for the bond. The bonds sell at a discount. c) What price did investors pay for each bond? Coupon: 28.75 28.75 28.75 28.75 28.75 28.75 … 28.75 28.75 28.75 28.75 28.75 28.75 28.75 Principal: $1,000 Coupon: Principal: PMT = $28.75 FV = $1,000 n = 10 years n = 10 years r = 6.25% per year r = 6.25% per year m = 2 payments per year m = 2 payments per year SourceDocument.docx Page 1 of 10 ©HToprac 2015-2022 FIN 320F Foundations of Finance 3.4 Stock & Bond Valuation - Solutions Coupon: N = 10 × 2 I% = 6.25 ÷ 2 PM T = (1000 × .0575) ÷ 2 FV = 0 PV = AL PH A EN TE R = -422.83 Principal: N = 10 × 2 I% = 6.25 ÷ 2 PM T = 0 FV = 1000 ...


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