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FIN3013

FIN3013. Lab #5. Practice Problem. Suppose that Claiborne Corporation agrees to pay you $500 every six months for 10 years and a lump sum of $10,000 in 10 years. Using an 8% discount rate, what is the present value of this promised cash flow?. What is a Bond?.

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FIN3013

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  1. FIN3013 Lab #5

  2. Practice Problem • Suppose that Claiborne Corporation agrees to pay you $500 every six months for 10 years and a lump sum of $10,000 in 10 years. Using an 8% discount rate, what is the present value of this promised cash flow? UTSA College of Business FIN3013Lab

  3. What is a Bond? • A financial instrument created when businesses or government agencies borrow money • The borrower agrees to pay a lump sum (face value) when the bond matures • The borrower will make periodic interest payments until maturity UTSA College of Business FIN3013Lab

  4. Bond Basics • Face Value • Stated on the bond • The amount that will be paid to the lender at maturity • Coupon Payment • The periodic payments made to the lender • Usually paid semi-annually • Coupon Rate • Stated on the bond • Used to calculate the coupon payment • Coupon Payment = Face Value X Coupon Rate UTSA College of Business FIN3013Lab

  5. Bond Basics • Bond calculation problems are simply an application of the TVM principles we have already learned • For example, in the practice problem: • the face value on the bond would be $10,000 • the coupon payment would be $500 • (What would the coupon rate on the bond be?) • the maturity would be 10 years UTSA College of Business FIN3013Lab

  6. Bond Example 1 • Turner Enterprises is offering a $10,000 face value bond with a 7% coupon rate. The bond matures in 15 years. If you require a 9.5% rate of return, what is the maximum price you would be willing to pay for the bond? UTSA College of Business FIN3013Lab

  7. Bond Example 2 • Meissner Mining is offering a $10,000 face value bond with a 8% coupon rate. The bond will mature in 20 years. If you require an 11% rate of return, what is the maximum price you would be willing to pay for the bond? UTSA College of Business FIN3013Lab

  8. Bond Example 3 • Sierra Manufacturing has issued 20-year bonds with a face value of $10,000 and a coupon rate of 7%. The bond is selling for $9,150. If you purchase the bond, what will your yield to maturity be? UTSA College of Business FIN3013Lab

  9. Bond Example 4 • Alpine Adventure Equipment has a $10,000 face value bond outstanding. The bond has a coupon rate of 13% and will mature in 12 years. If you pay $12,200 for the bond, what will your yield to maturity be? UTSA College of Business FIN3013Lab

  10. Bond Example 5 • Olympia Computers is offering a $10,000 face value, zero coupon bond that will mature in 15 years. If you require a 7.5% yield, what is the maximum price you would be willing to pay for this bond? UTSA College of Business FIN3013Lab

  11. Looking Ahead • Assignment #5 • Bond problems • Due at next lab meeting • Quiz #4 • Next lab meeting • Covering bond problems UTSA College of Business FIN3013Lab

  12. Questions?

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