Task: Bond Prices and Yields, Bond Pricing, Loan Payments, Present Values
Present Values
Compute the present value of a $100 cash flow for the following combinations of discount rates and times:
a. r = 8 percent. t = 10 years.
b. r = 8 percent. t = 20 years.
c. r = 4 percent. t = 10 years.
d. r = 4 percent. t = 20 years.
Loan Payments:
If you take out an $8,000 car loan that calls for 48 monthly payments at an APR of 10 percent, what is your monthly payment?
What is the effective annual interest rate on the loan?
Bond Pricing:
A 6-year Circular File bond pays interest of $80 annually and sells for $950. If Circular File wants to issue a new 6-year bond at face value, what coupon rate must the bond offer?
Bond Prices and Yields:
a. Several years ago, Castles in the Sand, Inc., issued bonds at face value at a yield to maturity of 7 percent. Now, with 8 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 15 percent.
What has happened to the price of the bond?
b. Suppose that investors believe that Castles can make good on the promised coupon payments, but that the company will go bankrupt when the bond matures and the principal comes due. The expectation is that investors will receive only 80 percent of face value at maturity.
If they buy the bond today, what yield to maturity do they expect to receive?