Problem 1) You are called in as a financial analyst to appraise the bonds of the Holtz Corporation. The $1,000 par value bonds have a quoted annual interest rate of 14 percent, which is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest.
There are 15 years to maturity.
a. Compute the price of the bonds based on semiannual analysis.
b. With 12 years to maturity, if yield to maturity goes down substantially to 8 percent, what will be the new price of the bonds?
Problem 2) Assume a $40,000 investment and the following cash flows for two alternatives.
Year Investment "X" Investment "Y"
1 $6,000 $15,000
2 $8,000 $20,000
3 $9,000 $10,000
4 $17,000
5 $20,000
Which of the alternatives would you select under the payback method?