10-14. Solution:
Katie Pairy Fruits Inc.
Calculator Solution:
N I/Y PV PMT FV
Answer: $1,224.08 Bond price
N I/Y PV PMT FV
Answer: $224.08 + 1,000 = 1,224.08 Bond price
a. Present Value of Interest Payments
Present Value of Principal Payment at Maturity
PV = FV × PVIF (n = 20, i = 12%) Appendix B
PV = $1,000 × .104 = $104
b. PVA = A × PVIFA (n = 20, i = 12%) Appendix D
$1,224.07
c. The answer to part a of $1,224.35 and part b of $1,224.07 are
basically the same because in both cases we are valuing the
present value of a $30 differential between actual return and
required return for 20 years.
In part b, we take the present value of the $30 differential to
arrive at $224.07. We then add this value to the $1,000 par
In part a, we accomplish the same goal by valuing all future
15. Effect of yield to maturity on bond price (LO10-2 and 3) Media Bias Inc. issued bonds
10 years ago at $1,000 per bond. These bonds had a 40-year life when issued and the annual
interest payment was then 12 percent. This return was in line with the required returns by
bondholders at that point in time as described next:
Real rate of return………… 2%
Inflation premium………… 5
Risk premium………………. 5
Total return………………. 12%
Assume that 10 years later, due to good publicity, the risk premium is now 2 percent and is
appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds
have 30 years remaining until maturity. Compute the new price of the bond.
10-15. Solution:
Media Bias Inc.
First compute the new required rate of return (yield to maturity)
Then, use this value to find the price of the bond.
Calculator Solution:
N I/Y PV PMT FV
Answer: $1,308.21 Bond price
Present Value of Interest Payments
Present Value of Principal Payment at Maturity
PV = FV × PVIF (n = 30, i = 9%) Appendix B
PV = $1,000 × .075 = $75.00
Total Present Value
16. Effect of yield to maturity on bond price (LO10-2 and 3) Wilson Oil Company issued
bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and
the annual interest payment was then 15 percent. This return was in line with the required
returns by bondholders at that point in time as described next:
Real rate of return………… 8%
Inflation premium………… 3
Risk premium………………. 4
Total return………………. 15%
Assume that 10 years later, due to bad publicity, the risk premium is now 7 percent and is
appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds
have 15 years remaining until maturity. Compute the new price of the bond.
10-16. Solution:
Wilson Oil Company
First compute the new required rate of return (yield to maturity).
Then, use this value to find the price of the bond.
Calculator Solution:
N I/Y PV PMT FV
Answer: $847.25 Bond Price
Present Value of Interest Payments
Present Value of Principal Payment at Maturity
17. Deep discount bonds (LO10-3) Lance Whittingham IV specializes in buying deep
discount bonds. These represent bonds that are trading at well below par value. He has his
eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays 4
percent annual interest and has 18 years remaining to maturity. The current yield to
maturity on similar bonds is 14 percent.
a.What is the current price of the bonds?
b. By what percent will the price of the bonds increase between now and maturity?
c. What is the annual compound rate of growth in the value of the bonds? (An
approximate answer is acceptable.)
10-17. Solution:
Lance Whittingham IV – Leisure Time Corporation
Calculator Solution:
(a)
N I/Y PV PMT FV
Answer: $353.26 Bond price
a. Current price of the bonds
Present Value of Interest Payments
Present Value of Principal Payment at Maturity
b. Percent increase at maturity
N I/Y PV PMT FV
Answer: 10%
20. Yield to maturity – A calculator or Excel is required (LO10-3) Evans Emergency
Response bonds have 6 years to maturity. Interest is paid semiannually. The bonds have a
10-20. Solution:
Semiannual:
N I/Y PV PMT FV
3.25% × 2 = 6.5% annual rate
(For the next two problems, assume interest payments are on a semiannual basis.)
21. Bond value––semiannual analysis (LO10-3) Heather Smith is considering a bond
investment in Locklear Airlines. The $1,000 par value bonds have a quoted annual interest
10-21. Solution:
Heather Smith and Locklear Airlines
Calculator Solution:
N I/Y PV PMT FV
Answer: $868.82 Bond price
Present Value of Interest Payments
Present Value of Principal Payment at Maturity
Present Value of Interest Payments $480.98
22. Bond value––semiannual analysis (LO10-3) You are called in as a financial analyst to
appraise the bonds of Olsen’s Clothing Stores. The $1,000 par value bonds have a quoted
annual interest rate of 10 percent, which is paid semiannually. The yield to maturity on the
bonds is 10 percent annual interest. There are 15 years to maturity.
a.Compute the price of the bonds based on semiannual analysis.
b. With 10 years to maturity, if yield to maturity goes down substantially to
8 percent, what will be the new price of the bonds?
10-22. Solution:
Olsen’s Clothing Stores
Calculator Solution:
(a)
N I/Y PV PMT FV
Answer: $1,000.00 Bond price
(b)
N I/Y PV PMT FV
Answer: $1,135.90 Bond price
a. Present Value of Interest Payments
Present Value of Principal Payment at Maturity
23. Preferred stock value (LO10-4) The preferred stock of Denver Savings and Loan pays an
annual dividend of $5.70. It has a required rate of return of 6 percent. Compute the price of
the preferred stock.
10-23. Solution:
Denver Savings and Loan
$5.70 $95
0.06
p
p
p
D
PK
= = =
24. North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed dividend
of $6 per share. With the passage of time, yields have soared from the original 6 percent to
14 percent (yield is the same as required rate of return).
a.What was the original issue price?
b. What is the current value of this preferred stock?
c. If the yield on the Standard & Poor’s Preferred Stock Index declines, how will the price
of the preferred stock be affected?