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CHAPTER 8 -
16.
P0
Enter 50 3.15% $1,000
N I/Y PV PMT FV
17. Miller Corporation
P0
Enter 26 3.5% $42.50 $1,000
N I/Y PV PMT FV
Solve for $1,126.68
P1
P3
Enter 20 3.5% $42.50 $1,000
N I/Y PV PMT FV
P8
Enter 10 3.5% $42.50 $1,000
N I/Y PV PMT FV
P12
Enter 2 3.5% $42.50 $1,000
N I/Y PV PMT FV
Modigliani Company
P0
Enter 26 4.25% $35 $1,000
N I/Y PV PMT FV
P1
Enter 24 4.25% $35 $1,000
N I/Y PV PMT FV
P3
1
CHAPTER 8 -
Enter 20 4.25% $35 $1,000
N I/Y PV PMT FV
P8
Enter 10 4.25% $35 $1,000
N I/Y PV PMT FV
P12
Enter 2 4.25% $35 $1,000
N I/Y PV PMT FV
18. If both bonds sell at par, the initial YTM on both bonds is the coupon rate, 6.5 percent. If the YTM
suddenly rises to 8.5 percent:
PLaurel
Enter 3 4.25% $32.50 $1,000
N I/Y PV PMT FV
PHardy
Enter 20 4.25% $32.50 $1,000
N I/Y PV PMT FV
If the YTM suddenly falls to 4.5 percent:
PLaurel
Enter 3 2.25% $32.50 $1,000
N I/Y PV PMT FV
PHardy
Enter 20 2.25% $32.50 $1,000
N I/Y PV PMT FV
All else the same, the longer the maturity of a bond, the greater is its price sensitivity to changes in
interest rates.
19. Initially, at a YTM of 10 percent, the prices of the two bonds are:
PFaulk
Enter 24 5% $30 $1,000
N I/Y PV PMT FV
2
CHAPTER 8 -
PGonas
Enter 24 5% $70 $1,000
N I/Y PV PMT FV
PFaulk
Enter 24 6% $30 $1,000
N I/Y PV PMT FV
PGonas
Enter 24 6% $70 $1,000
N I/Y PV PMT FV
If the YTM declines from 10 percent to 8 percent:
PFaulk
Enter 24 4% $30 $1,000
N I/Y PV PMT FV
PGonas
Enter 24 4% $70 $1,000
N I/Y PV PMT FV
20.
Enter 18 ±$1,040 $31 $1,000
N I/Y PV PMT FV
21. The company should set the coupon rate on its new bonds equal to the required return; the required
return can be observed in the market by finding the YTM on outstanding bonds of the company.
Enter 40 ±$1,063 $32 $1,000
N I/Y PV PMT FV
24. Current yield = .0842 = $90/P0 ; P0 = $1,068.88
3
CHAPTER 8 -
Enter 7.81% ±$1,068.88 $90 $1,000
N I/Y PV PMT FV
25.
Enter 22 ±$1,053.12 $36.20 $1,000
N I/Y PV PMT FV
27.
a. Po
Enter 50 5.4%/2 $1,000
N I/Y PV PMT FV
b. P1
Enter 48 5.4%/2 $1,000
N I/Y PV PMT FV
P24
Enter 2 5.4%/2% $1,000
N I/Y PV PMT FV
c. Total interest = $1,000 – 263.92 = $736.08
d. The company will prefer straight-line method when allowed because the valuable interest
28. a. The coupon bonds have a 6% coupon rate, which matches the 6% required return, so they will
Enter 60 6%/2 $1,000
N I/Y PV PMT FV
b. Coupon bonds: repayment = 50,000($1,030) = $51,500,000
c. Coupon bonds: (50,000)($60)(1 – .35) = $1,950,000 cash outflow
4
CHAPTER 8 -
N I/Y PV PMT FV
Solve for $180.07
29.
Bond P
P0
Enter 10 7% $85 $1,000
P1
Enter 9 7% $85 $1,000
N I/Y PV PMT FV
Solve for $1,097.73
Bond D
P0
Enter 10 7% $55 $1,000
P1
Enter 9 7% $55 $1,000
N I/Y PV PMT FV
Solve for $902.27
All else held constant, premium bonds pay a higher current income while having price depreciation
as maturity nears; discount bonds pay a lower current income but have price appreciation as maturity
30.
a.
Enter 10 ±$930 $49 $1,000
N I/Y PV PMT FV
b.
Enter 8 4.84% $49 $1,000
N I/Y PV PMT FV
5
CHAPTER 8 -
The HPY is:
Enter 2 ±$930 $49 $1,003.64
N I/Y PV PMT FV
31.
PM
CFo$0
C01 $0
F01 12
C02 $800
PN
Enter 40 3.2% $30,000
34.
Real return for stock account: 1 + .12 = (1 + r)(1 + .04); r = 7.6923%
Enter 7.6923% 12
NOM EFF C/Y
NOM EFF C/Y
NOM EFF C/Y
Stock portfolio value:
Enter 12 × 30 7.4337% / 12 $900
N I/Y PV PMT FV
6
CHAPTER 8 -
Enter 12 × 30 2.8472% / 12 $300
N I/Y PV PMT FV
Retirement withdrawal:
Enter 25 × 12 3.7800% / 12 $1,367,048.74
N I/Y PV PMT FV
The last withdrawal in real terms is:
Enter 30 + 25 4% $7,050.75
N I/Y PV PMT FV
35.
Future value of savings:
Year 1:
Enter 4 9% $178,204
N I/Y PV PMT FV
Year 2:
Enter 3 9% $203,717.63
N I/Y PV PMT FV
Year 3:
Enter 2 9% $231,856.50
N I/Y PV PMT FV
Year 4:
Enter 1 9% $262,556.08
N I/Y PV PMT FV
He will spend $500,000 on a luxury boat, so the value of his account will be:
Enter 25 9% $873,279.31
N I/Y PV PMT FV
7
