Assignment 3

a. The Yield to Maturity (YTM) is the nominal rate of return which investors would realize if they held the bond to maturity and the bond did not default.

Stephens Security has two financing alternatives: (1) A publicly placed $50 million bond issue. Issuance costs are $1 million, the bond has a 9% coupon paid semiannually, and the bond has a 20-year life. (2) A $50 million private placement with a large pension fund. Issuance costs are $500,000, the bond has a 9.25% annual coupon, and the bond has a 20-year life. Which alternative has the lower cost (annual percentage yield)?

The yield to maturity on a 15-year bond is a true estimate of the cost of 30-year bond

a) In the first set of calculations, the staff used a discount rate of 20%, a five-year time horizon, and ignored taxes and terminal value. What is the relative attractiveness of these three alternatives?

2. St. Luke’s Convalescent Center has $200,000 in surplus funds that it wishes to invest in marketable securities. If transaction costs to buy and sell the securities are $2,200 and the securities will be held for three months, what required annual yield must be earned before the investment makes economic sense?

The Yield to Maturity (YTM) of a bond is:   Interest rate that makes the present value of the bond’s

Since the probability of it being called is high, people will not want to buy and own the bond because it will be bought back in a short period of time.

Explain why you should use the YTM and not the coupon rate as the required return for debt. (5 pts)

2. An 8 percent semiannual coupon bond is priced at $1,204.60. The bond has a

In conclusion the data shows that the intermediate government bonds are the better investment. These bonds are only slightly riskier than their corporate counterparts. This risk is offset by the returns the government bonds bring in. Why would we opt for the corporate bonds -3% return over one year when we could have the government bonds 6% over the same time period? The same is true in the long-term because the government bonds mean net return after five years is 4%. Over the same five years the mean return for corporate bonds will be halved to

Since the interest payments are tax deductible, the aftertax cash flow from the interest payments will be:

Through this method, we obtained theoretical yields of the 4.25% coupon bond and 10.625% coupon bond to be 2.899% and 2.639% respectively. The corresponding theoretical prices of the bonds are $108.27 for the 4.25% coupon bond and $149.31 for the 10.625% coupon bond (see Table 1 above).

So By looking at Coupon Rate & YTM, one can predict of Bond is traded at Par, Discount or Premium

Coupon bond is one that is below its nominal value. 99.05 It is less than 100 percent of the cash value of the price, which will be traded. Above the face value of the bond premium bond. 101,15 more than 100 percent of the cash value of your price quote. Market interest rates rise above the coupon rate of the bond discount bond when the bond is. Market interest rates, the bond 's coupon rate is below the bonds when the bond underwriters.

4. Consider a bond issued at par. The annual coupon is 8 percent and frequency of coupon is semiannual. How would the YTM of this bond be reported in most of the European markets?