Section I I 7. (10 Points) What is the yield to maturity for the Cornwall Linkag

Q: Section I I 7. (10 Points) What is the yield to maturity for the Cornwall Linkag

7. YTM of bond = [$1,000 / $530) ^ (1 / 14)] - 1 = [1.8868 ^ (1 / 14)] - 1 = 1.0464 - 1 = 4.64% YTM of bond is 4.64%.

ID: 2783894 • Letter: S

Question

Section II

7. (10 Points) What is the yield to maturity for the Cornwall Linkage Company zero coupon $1,000 bond that matures in 14 years assuming that the bond is currently selling for $530.00 (hint: this bond does not have a coupon rate and therefore, only a maturity value and no regular cash flows)?

…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… $___________

8. (30 points). Cornwall Agency issued $50 million of 20-year corporate bonds in 2010. The bonds were issued in $1000 denominations with an annual coupon interest rate of 8%. Give your answers to a, b, and c below:

What is the current rate of return also called the current yield on these bonds if they are purchased at a current price of $900 each?

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… $___________

b.. Value the bond, that is, find the intrinsic value (Vb) of the $1,000 bond assuming a client is requiring an interest rate of 11.5%. You could use the Excel spreadsheet, a financial calculator or the formula as we did in the study of time value of money (TVM). Note that the bond has 13 more years to expire and therefore N = 13 and the market price is $900.

c.. From the results in (b) above would you recommend her to invest in the bond?

YES ________ NO _______

YOUR REASONING IS: ………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

SECTION III

(20 Points). In 15 years’ time you wish to purchase a house in Avalon Park, FL currently valued at $180,000. The value of the asset is expected to increase at a growth rate of 2.75% per year. You wish to set aside equal end-of-monthly payments so that in 15 years’ time you would buy the house for cash. What is the equal monthly amounts to set aside, assuming that you could earn a 9% return on your set aside amounts over the period? This simulation is best handled in two parts, as we did in class, as follows:

Projected asset value:

Set Aside end-of-month payments (PMT) would be:

Explanation / Answer

YTM of bond = [$1,000 / $530) ^ (1 / 14)] - 1

= [1.8868 ^ (1 / 14)] - 1

= 1.0464 - 1

= 4.64%

YTM of bond is 4.64%.

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Section I I 7. (10 Points) What is the yield to maturity for the Cornwall Linkag

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