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Chapter 6 CFIN5
Chapter 6 Solutions
6-1
$1,000
Minimum $40
stock price 25
= =
6-2 a. Each bond can be converted into 40 shares of common stock.
b.
$1,000
Minimum $25
stock price 40
= =
; As long as the stock is selling for greater than $25 per share, it is
worthwhile to convert (ignoring transactions costs).
6-3 Selling the bond would generate $980. Converting the bond and selling the common stock would
6-4 Calculator solution:
N = interest payments remaining until maturity = 10 x 2 = 20
I/Y = 6.0/2 = 3.0
Equation solution:
20
20
1
1
1(1.03)
Value $1,000 $22.50 0.03
(1.03)
$1,000(0.553675) $22.50(14.877474)
$553.68 $334.74 $888.42
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-
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ê ú ê ú
ë û ê ú
ë û
= +
= + =
6-5 Calculator solution:
N = interest payments remaining until maturity = 4 x 2 = 8
I/Y = 7.0/2 = 3.5
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Chapter 6 CFIN5
Equation solution:
8
8
1
1
1(1.035)
Value $1,000 $25 0.035
(1.035)
$1,000(0.759411) $25(6.873956)
$759.41 $171.85 $931.26
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-
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ë û ê ú
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= + =
6-6 Calculator solution:
N = interest payments remaining until maturity = 8 x 2 = 16
I/Y = 4.0/2 = 2.0
PMT = Interest payment = (0.09 x 1,000)/2 = 45
FV = 1,000
PV = ? = -1,339.44
Chapter 6 CFIN5
FV = 1,000
PV = ? = -832.32
Equation solution:
12
12
1
1
1(1.06)
Value $1,000 $40 0.06
(1.06)
$1,000(0.496969) $40(8.383844)
$496.97 $335.35 $832.32
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6-9 a. Market rate = 5%
Calculator solution for Bond S:
N = interest payment remaining until maturity = 1
I/Y = 5
PMT = Interest payment = 100
FV = 1,000
PV = ? = -1,047.62
Chapter 6 CFIN5
Calculator solution for Bond S:
N = interest payment remaining until maturity = 1
I/Y = 7
PMT = Interest payment = 100
FV = 1,000
PV = ? = -1,028.04
Chapter 6 CFIN5
6-11 a. Interest payments = [0.09($1,000)]/2 = $45
Number of interest payments remaining until maturity = 4 x 2 = 8
Chapter 6 CFIN5
( )
( ) ( )
1
10
YTM
12
10
1
1
$1,022 $27.50 $1,000
YTM YTM
1
22
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-é ù
ê ú ê ú
ê ú
= + ê ú
ê ú ê ú
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+
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ê ú
ë û
ë û
ë û
6-13 a. Interest payments = [0.04($1,000)]/2 = $20
Number of interest payments remaining until maturity = 16 x 2 = 32
Equation solution (set up):
( )
( ) ( )
1
32
YTM
12
32
1
1
$714 $20 $1,000
YTM YTM
1
22
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+
ê ú
ë û
é ù
-é ù
ê ú ê ú
ê ú
= + ê ú
ê ú ê ú
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+
ê ú ê ú
ê ú
ë û
ë û
ë û
b. Number of interest payments remaining until call date = 3 x 2 = 6
Call price = $1,040
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Chapter 6 CFIN5
PMT = 20
FV = 1,016
I/Y = ? = 8.50, which is the six-month yield
YTM = 8.50 x 2 = 17.0%
6-14 a. Interest payments = [0.085($1,000)]/2 = $42.50
b. Number of interest payment remaining until call date = 4 x 2 = 8
Call price = $1,085
6-15 a. Current yield = (0.07 x 1,000)/996 = 0.070 = 7.0%
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Chapter 6 CFIN5
b. Interest payments = 0.07($1,000) = $70
Number of interest payments remaining until maturity = 8
6-16 (1) Market value of the bond two (2) years after issue:
Calculator solution:
N = interest payments remaining until maturity = 8 x 2 = 16
I/Y = 6/2 = 3
PMT = Interest payment = (0.10 x 1,000)/2 = 50
FV = 1,000
PV = ? = -1,251.22
Chapter 6 CFIN5
6-17 (1) Market value of the bond four (4) years after issue:
Calculator solution:
N = interest payments remaining until maturity = 11 x 2 = 22
I/Y = 10/2 = 5
PMT = Interest payment = (0.07 x 1,000)/2 = 35
FV = 1,000
PV = ? = -802.55
Chapter 6 CFIN5
6-18 a. Current yield = (0.04 x 1,000)/1,000 = 0.04 = 4.0%
b. Equation solution (set up):
( )
( ) ( )
1
9
YTC
12
9
1
1
$929 $40 $1,000
YTC YTC
1
22
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+
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ë û
é ù
-é ù
ê ú ê ú
ê ú
= + ê ú
ê ú ê ú
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+
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ê ú
ë û
ë û
ë û
Calculator solution for YTM:
N = 9
PV = -929
PMT = 0.04 x 1,000 = 40
FV = 1,000
I/Y = ? = 5.0, this represents the yield that new bondholders would earn if they buy the bond for
$929 today.
6-19 a. Calculator solution:
N = interest payments remaining until maturity = 7
I/Y = 6.0
PMT = Interest payment = (0.06 x 1,000) = $60
FV = $1,000
PV = ? = -1,000.00
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Chapter 6 CFIN5
Chapter 6 CFIN5
(2) Year 2: Current price = $811.62 (two years remain until maturity)
Input N = 1, I/Y = 11, PMT = 0, and FV = 1,000; compute PV = -900.90, which was the value
(3) Year 3: Current price = $900.90 (two years remain until maturity)
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
