Answer the following questions and put calculations: 11. Find the present value

Question

Answer the following questions and put calculations:

11. Find the present value of a perpetuity of $1,500 per year, given a 20% opportunity cost.

a.$800

b.$3,000

c.$300

d.$6,000

e.$7,500

12. If a 30-year, $1,000 bond has a 9% coupon and is currently selling for $826, its current yield is:

a.$90

b.9.0%

c.10.9%

d.12.0%

13. If a bond is selling at par value, which of the following would be the same as its coupon rate:

a.Current Yield

b.Yield to Maturity

c.Market Interest Rate

d.Both b & c

e.All of the above

14. Addleson Corp. has a $1,000 par value bond outstanding that was issued for 30 years 5 years ago at a coupon rate of 15%. The yield on similar bonds is now 12%. What is its price?

a.$1,235.27

b.$2,418.58

c.$836.74

d.$1,236.44

15. A bond is available for purchase that has a face value of $10,000, an 8% coupon, payable semiannually, and 20 years of its original 25 years left to maturity. Approximately how much would you pay for the bond if the market return on similar bonds is 10%?

a.$8,184.60

b.$8,296.88

c.$8,283.64

d.$8,174.36

Explanation / Answer

11)

present value of perpetuity = cash flow per year/rate per year

= 1500/0.2

= 7500

choose e)

12)

current yield = coupon payment/current price

= 1000*9%/826

= 90/826

= 10.9%

13)

If a bond is selling at par then coupon rate is equal to yield to maturity also equal to current yield also interest rate

choose e)

14)

price of bond = coupon payment * [1-(1+i)^-n ]/i + facevalue/(1+i)^n

price = 150 * [1-(1+12%)^-25]/12% + 1000/(1+12%)^25

= 1235.27

choose a)

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