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Chapter 4: Q4DQ (page 319)
If inflationary expectations increase, what is likely to happen to the yield to maturity on bonds in the marketplace? What is also likely to happen to the price of bonds?
Yield to maturity would be higher in case of an increase in inflationary expectation, and the bond price would fall.
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The Clearinghouse Sweepstakes has just informed you that you have won \(1 million. The amount is to be paid out at the rate of \)20,000 a year for the next 50 years. With a discount rate of 10 percent, what is the present value of your winnings?
Jim Busby calls his broker to inquire about purchasing a bond of Disk Storage Systems. His broker quotes a price of \(1,180. Jim is concerned that the bond might be overpriced based on the facts involved. The \)1,000 par value bond pays 14 percent interest, and it has 25 years remaining until maturity. The current yield to maturity on similar bonds is 12 percent. Compute the new price of the bond and comment on whether you think it is overpriced in the marketplace.
Assume a \(90,000 investment and the following cash flows for two alternatives:
Year | Investment A | Investment B |
1 | \)25,000 | \(40,000 |
2 | 30,000 | 40,000 |
3 | 25,000 | 28,000 |
4 | 19,000 | -- |
5 | 25,000 | -- |
a. Calculate the payback for investments A and B.
b. If the inflow in the fifth year for Investment A was \)25,000,000 instead of $25,000, would your answer change under the payback method?
Bonds issued by the Coleman Manufacturing Company have a par value of \(1,000, which of course is also the amount of principal to be paid at maturity. The bonds are currently selling for \)690. They have 10 years remaining to maturity. The annual interest payment is 13 percent ($130). Compute the yield to maturity
The Hudson Corporation makes an investment of \(24,000 that provides the following cash flow:
Year | Cash flow |
1 | \)13,000 |
2 | 13,000 |
3 | 4,000 |
a. What is the net present value at an 8 percent discount rate?
b. What is the internal rate of return?
c. In this problem, would you make the same decision under both parts a and b?
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