1. What is the yield to maturity for the Cornwall Linkage Company zero coupon $1,000 bond that matures in 14 years assuming that the bond is currently selling for $530.00 (hint: this bond does not have a coupon rate and therefore, only a maturity value and no regular cash flows)?
$___________
2. Cornwall Agency issued $50 million of 20-year corporate bonds in 2010. The bonds were issued in $1000 denominations with an annual coupon interest rate of 8%. Give your answers to a, b, and c below:
What is the current rate of return also called the current yield on these bonds if they are purchased at a current price of $900 each?
$___________
b. Value the bond, that is, find the intrinsic value (Vb) of the $1,000 bond assuming a client is requiring an interest rate of 11.5%. You could use the Excel spreadsheet, a financial calculator or the formula as we did in the study of time value of money (TVM). Note that the bond has 13 more years to expire and therefore N = 13 and the market price is $900.
$___________
c. From the results in (b) above would you recommend her to invest in the bond?
YES ________ NO _______
YOUR REASONING IS:
SECTION III
In 15 years’ time you wish to purchase a house in Avalon Park, FL currently valued at $180,000. The value of the asset is expected to increase at a growth rate of 2.75% per year. You wish to set aside equal end-of-monthly payments so that in 15 years’ time you would buy the house for cash. What is the equal monthly amounts to set aside, assuming that you could earn a 9% return on your set aside amounts over the period? This simulation is best handled in two parts, as we did in class, as follows:
Projected asset value:
$________
Set Aside end-of-month payments (PMT) would be:
$________