The Trading Depot has $1,000 face value bonds outstanding with amarket price of

Question

The Trading Depot has $1,000 face value bonds outstanding with amarket price of $980. The bonds pay interest annually, mature in 8years, and have a yield to maturity of 7.339 percent. What is thecurrent yield?

a. 7.00 percent
b. 7.14 percent
c. 7.34 percent
d. 7.59 percent
e. 7.88 percent

The Spartan Electrical Company is considering a new projectthat will require an initial cash investment of $315,800. Theproject will produce no cash flows for the first three years. Theprojected cash flows for years 4 through 8 are $73,000, $112,000,$124,000, $136,000, and $145,000, respectively. How long will ittake the firm to recover its initial investment in thisproject?

a. 5.81 years
b. 6.05 years
c. 6.96 years
d. 7.90 years
e. This project never paysback

Six years ago, Alex Industries paid cash for a new milling machinethat cost $67,000. Three years ago, the firm spent $4,300 onrepairs and modifications to the machine. The machine is now fullydepreciated and has just sat idly in a back corner of the shop forthe past 18 months. The estimated value of the machine today is$13,500. The firm is considering using this machine in a newproject. If it does so, what value should be assigned to thismachine and included in the initial costs of the project?

a. $0
b. $13,500
c. $17,800
d. $67,000
e. $71,300

Explanation / Answer

8 years

Year

Cashflows

Net Cashflows

Current Market Value of the Bond(PV) $980 Face Value (or) Future Value of the Bond (FV) $1,000 Yield to Maturity 7% Number of years to Maturity

8 years

Calculating Annual CouponAmount (or) Interest Amount: (Using Ms-Excel "PMT"Function): Interest rate (Rate) 7.339% Number of Periods (Nper) 8 Current Market Value of the Bond (PV) -$980 Face Value (or) Future Value of the Bond (FV) $1,000 Annual Coupon Payment (PMT) $70.00 Annual Coupon Rate = $70 / $1,000 = 0.07 7.00% Bond's Current Yield = AnnualCoupon / Current Market Value of the Bond Current Yield = $70 / $980 = 7.14% Current Yield = 7.14%

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