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1) A 10-year, 12% semiannual coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,060
1)
A 10-year, 12% semiannual coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been issued.)
a. What is the bond's yield to maturity?
2)
A project costing $230,000 has a Net Present Value (NPV) of -$24,400. Which one of the following statements is correct?
a. The Present Value of future cash flows equals -$254,400.
b. The Present Value of future cash flows equals -$24,400
c. The Present Value of future cash flows equals $205,600.
d. The Present Value of future cash flows equals $254,400.
Expert Solution
1)
Computation of Bond's Yield to Maturity using Rate Function in Excel:
=rate(nper,pmt,-pv,fv)
Here,
Rate = Yield to Maturity = ?
Nper = Number of Periods = 10 years*2 = 20 Periods
PMT = Semiannual Coupon Payment = $1,000*12%/2 = $60
PV = Sales Value = $1,100
FV = Face Value = $1,000
Substituting the values in formula:
=rate(20,60,-1100,1000)*2
Rate or Yield to Maturity = 10.37%
2)
Computation of Present Value of Future Cash Flows:
Present Value of Future Cash Flows = Initial Investment + Net Present Value
= $230,000 + (-$24,400)
= $230,000-$24,400
Present Value of Future Cash Flows = $205,600
The correct option is C "The Present Value of future cash flows equals $205,600".
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