managerial finance

Week 5 - Overview & Learning Objectives

Week 5 - Overview & Learning ObjectivesAttached Files:

•  Chapter 5-Bonds, Bond Valuation, and Interest Rates..pptx Chapter 5-Bonds, Bond Valuation, and Interest Rates..pptx - Alternative Formats (894.635 KB)

Assigned Readings:Chapter 5. Bonds, Bond Valuation, and Interest Rates.Overview:Some of the various types of bonds are treasury bonds, treasury bills, corporate bonds, municipal bonds, and foreign bonds.  The market interest rate of a bond is determined by the risk-free rate, the inflation premium, the maturity risk premium, default risk premium and the liquidity premium.  It is important to understand that a bond’s price has an inverse relationship to current market rate of interest, therefore, as interest rates rise, the value or your bond will decrease.Learning Objectives:Chapter 5: Bonds, Bond Valuation, and Interest RatesLearning Objectives:

1. Understand Bonds issuance and the Key Characteristics of Bonds
2. Understand Bond Valuation
3. Determinants of Market Interest Rates  
4. Understand Risk-Free Interest Rate
5. Understand Inflation Premium (IP)
6. Understand Maturity Risk Premium (MRP)
7. Understand Default Risk Premium (DRP)
8. Understand Liquidity Premium (LP)
9. Understand the Term Structure of Interest Rates
10. Financing with Junk Bonds
11. Bankruptcy and Reorganization

Problem Set #5

1. Jackson Corporation’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 9%. The bonds have a yield to maturity of 10%. What is the current market price of these bonds?2. Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 10 years, have a face value of $1,000, and a yield to maturity of 9%. What is the price of the bonds?3. Wilson Wonders’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $900. What is their yield to maturity?4. Heath Foods’s bonds have 10 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 9%. They pay interest annually and have a 10% coupon rate. What is their current yield?5. Suppose Hillard Manufacturing sold an issue of bonds with a 12-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments.

1. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 5%. At what price would the bonds sell?
2. Suppose that 2 years after the initial offering, the going interest rate had risen to 11%. At what price would the bonds sell?
3. Suppose that 2 years after the issue date (as in part a) interest rates fell to 5%. Suppose further that the interest rate remained at 6% for the next 10 years. What would happen to the price of the bonds over time?

Submit your answers in a Word document.