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Chapter 5: Q6BP (page 528)

The Florida Investment Fund buys 58 bonds of the Gator Corporation through a broker. The bonds pay 10 percent annual interest. The yield to maturity (marketrate of interest) is 12 percent. The bonds have a 10-year maturity.

Using an assumption of semiannual interest payments:

a.Compute the price of a bond (refer to 鈥淪emiannual Interest and BondPrices鈥� in Chapter 10 for review if necessary).

b.Compute the total value of the 58 bonds.

Short Answer

Expert verified

a. Price of bond equals $885.30.

b. Total value of 58 bonds equals $51,347.40.

Step by step solution

01

Computation of coupon payment

Assuming the par value of the bond = $1,000

Semi-annual interest rate equals 6% (12% / 2).

Semi-annual periods equals 20 (10 x 2).

Coupon=Parvalue脳Semi-annualcoupanrate=$1,000脳5%=$50

02

Computation of price of bond

Priceperbond=CouponPayment脳(1-1+r-nr)+FaceValue(1+r)n=50脳(1-1+0.06-10脳20.06)+1,000(1+0.06)10脳2=$885.30

03

 Step 3: (b) Computation of Price of 58 bonds

Priceof58bonds=Priceofasinglebond脳No.ofbonds=$885.30脳58=$51,347.40

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Most popular questions from this chapter

What method of 鈥渂ond repayment鈥� reduces debt and increases the amount of common stock outstanding? (LO16-3)

In addition to U.S. corporations, what government groups compete for funds in the U.S. capital markets?

Question: The Bowman Corporation has a \(18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new \)18,000,000 issue is \(530,000, and the underwriting cost on the old issue was \)380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.

b. Calculate the present value of total inflows.

Becker Brothers is the managing underwriter for a 1.45-millon-share issue by Jay鈥檚 Hamburger Heaven. Becker Brothers is 鈥渉andling鈥� 10 percent of the issue. Its price is \(27 per share, and the price to the public is \)28.95.

Becker also provides the market stabilization function. During the issuance, the market for the stock turns soft, and Becker is forced to purchase 50,000 shares in the open market at an average price of \(27.50. It later sells the shares at an average value of \)27.20.

Compute Becker Brother鈥檚 overall gain or loss from managing the issue.

The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders鈥� claims are also shown.

Assets

Book value

Liquidation value

Accounts receivables

\(1,400,000

\)1,200,000

Inventory

\(1,800,000

\)900,000

Machinery and equipment

\(1,100,000

\)600,000

Building and plant

\(4,200,000

\)2,500,000

Total assets

\(8,500,000

\)5,200,000

Liabilities and stockholder鈥檚 claims

Liabilities

Accounts payable

\(2,800,000

First lien, secured by machinery and equipment

\)900,000

Senior unsecured debt

\(2,200,000

Subordinated debenture

\)1,700,000

Total liabilities

\(7,600,000

Stockholder鈥檚 claims

Preferred stock

\)250,000

Common stock

\(650,000

Total stockholder鈥檚 claims

\)900,000

Total liabilities and stockholder鈥檚 claims

\(8,500,000

c. Assuming the administrative costs of bankruptcy, workers鈥� allowable wages, and unpaid taxes add up to \)400,000, what is the total remaining asset value available to cover secured and unsecured claims?
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