Page ls Tuesday, January 6, 2007 MATURITY RATE MONE BID ASKED CHG ASK YLD 4.25 N
ID: 2787362 • Letter: P
Question
Page ls Tuesday, January 6, 2007 MATURITY RATE MONE BID ASKED CHG ASK YLD 4.25 Now 27 100.40 100.50 375 4.18 For how much will a dealer sell a wit of this bend in dlrs? wh= oopon will be paid on the bond? (6p) 7b. What is the dollar amount of the reported change in asked price from the peevious day? For how much did the bond sell on this (peevious) day? (6 pt.) Calculate the Payback Periods for Project A. If your firm expects to recover its investment in such projects within 3 years, will you accept the project? (8 pt) 7e Yr 0 Yr 1Y 2 A: 175,000 83, 000 B: 350, 000200,000 130,000 -$ 83,000 - 90,000 $ 83,000Explanation / Answer
Bond dealer sells at the asked price so the price will be equal to asked price of $100.5
Coupon can be calculated by equating bond price to present value of all payments.
Bond Price = Coupon /(1+yield) + Coupon /(1+yield)2 + Coupon /(1+yield)3 +......+ Coupon /(1+yield)20+ Maturity/(1+yield)20
100.5 = Coupon/1.0418 + Coupon/ 1.04182 +............................Coupon/1.041820 + 100/1.041820
In the above equation we see a sum of geometric series with first term Coupon /1.0418 and common ratio of 1.0418 with 20 terms
Sum of geometric progression = First term * (1- common rationnumber of terms)/(1- common ratio)
100.5 = Coupon/1.0418 * (1 - (1/1.0418)20) /(1-(1/1.0418) + 100/1.041820
100.5 = 13.37625773 * Coupon + 100/1.041820
Coupon = 4.22
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Change in asked price = $0.375
Previous Day's asked price = Asked price today - Change in asked price
= $100.5 -$0.375 = $100.125
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Payback period for A would be the time in years when the initial investment of $175,000 is recouped from cashflows.
Year 1 cashflow = -$83,000
Year 2 Cashflow = -$83,000
Year 3 cashflow = -$83,000
There are no positive cashflows in the first three years. The initial investment has not been recovered due to negative cashflows and therefore the firm will not accept Project A.
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