Managerial Finance: Maturity Bonds and Rate of Return of Assets

Managerial Finance 1 Assignment 8
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Managerial Finance 1 Assignment 8
Part A: Moore Company is about to issue a bond with semiannual coupon payments, a coupon rate of 8%, and par value of $1,000. The yield-to-maturity for this bond is 10%.a. What is the price of the bond if the bond matures in 5, 10, 15, or 20 years?
Mishkin and Eakins (2006) describe the Time Value of Money (TVM) tool for bond pricing.
Years to maturity, N=10
YTM or I/Y = 5%
Coupon PMT = 40
Par Value = 1000
When N = 5 Years:
Price = $1,000.00 × 1/ (1.05)10+ $40.00 (1 – 1/ (1.05)10)/ 0.05
= $1,000.00 × 0.6139 + $40.00 × 7.7217
= $613.91 + $308.87
= $922.78
When N=10 years:
Price = $1,000.00 × 1/ (1.05)20 + $40.00 (1 – 1/ (1.05)20)/ 0.05
= $1,000.00 × 0.3769 + $40.00 × 12.4622
= $376.89 + $498.49
= $875.38
When N = 15 years:
Price = $1,000.00 × 1/ (1.05)30+ $40.00 (1 – 1/ (1.05)30)/ 0.05
= $1,000.00 × 0.2314 + $40.00 × 15.3725
= $231.38 + $614.90 = $846.28
When N = 20 years:
Price = $1,000.00 × 1/ (1.05)40+ $40.00 (1 – 1/ (1.05)40)/ 0.05
= $1,000.00 × 0.1420 + $40.00 × 17.1591
= $142.05 + $686.36
= $828.41b. What do you notice about the price of the bond in relationship to the maturity of the bond?When everything else is held constant, the longer the maturity of the bond selling at a discount, the lower the bond price. This implies an inverse relationship between bond price and the maturity of the bond selling at a discount.
Part B: The Crescent Corporation just paid a dividend of $2 per share and is expected to continue paying the same amount each year for the next four years. If you have a required rate of return of 13%, plan to hold the stock for four years, and are confident that it will sell for $30 at the end of four years, how much should you offer to buy it at today?
Maturity, N (number of periods) =4 years
I/Y (Interest per year) = 13%
PMT (Periodic Payment) = 2
FV = 30
Year 1 cash...