1.In 2005,soccer player David Beckman signed a contract reported to be worth $51
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Question
1.In 2005,soccer player David Beckman signed a contract reported to be worth $51million. ThB. contract called for $2 million immediately and $10 million in 2006. The remaining $39 million was to be paid as %9 million in 2007.%7 million in 2008,$6 million in 2009,$5million in 2010. $4 million in 2011 and in 2012, $2 million in 2013, and $ 1million in 2014 and 2015. Assuming all payments, except the first $2 million are paid at the end of each year and the discount rate is 9% what kind of deal did the soccer player snag?
2. Jason Greg is a recent retiree who is interested in investing some of his saving in corporate bonds. Listed are the bonds
A. Bond A has a 7.5% semiannual coupon, matures in 12 years, and has a $1,000 face value.
B. Bond B has a 10% semiannual coupon, matures in 12 years,and has a $1,000 face value.
C.Bond C has an 11.5% semiannual coupon, matures in 12 years, and has a $1,000 face value.
Each bond has a YTM of 10%..
1. Before calculating the prices of the bonds, indicate whether each bond is trading a premium, discount or par.
2. Calculate the price of each of these bonds.
3.Calculate the current yield for each bond.
Explanation / Answer
1.In 2005,soccer player David Beckman signed a contract reported to be worth $51million. ThB. contract called for $2 million immediately and $10 million in 2006. The remaining $39 million was to be paid as %9 million in 2007.%7 million in 2008,$6 million in 2009,$5million in 2010. $4 million in 2011 and in 2012, $2 million in 2013, and $ 1million in 2014 and 2015. Assuming all payments, except the first $2 million are paid at the end of each year and the discount rate is 9% what kind of deal did the soccer player snag?
1. Present value of the contract = 2+ 10/1.09 + 9/1.09^2 + 7/1.09^3 + 6/1.09^4 + 5/1.09^5 + 4/1.09^6 + 4/1.09^7 + 2/1.09^8 + 1/1.09^9 + 1/1.09^10= $38.11 million
Present value is less than $51 million
Contract is not good
2. Jason Greg is a recent retiree who is interested in investing some of his saving in corporate bonds. Listed are the bonds
A. Bond A has a 7.5% semiannual coupon, matures in 12 years, and has a $1,000 face value.
B. Bond B has a 10% semiannual coupon, matures in 12 years,and has a $1,000 face value.
C.Bond C has an 11.5% semiannual coupon, matures in 12 years, and has a $1,000 face value.
Each bond has a YTM of 10%..
1. Before calculating the prices of the bonds, indicate whether each bond is trading a premium, discount or par.
If YTM> Coupon rate, then Discount
If YTM< Coupon rate, then Premium
YTM= Coupon rate, then Par
Bond A
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