1. Seether Co. wants to issue new 19-year bonds for some much-needed expansion projects.

The company currently has 12.1 percent coupon bonds on the market that sell for $1,517.15, make semiannual payments, and mature in 19 years. The company should set a coupon rate of percent on its new bonds if it wants them to sell at par. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16.))
Explanation:

The company should set the coupon rate on its new bonds equal to the required return. The required return can be observed in the market by finding the YTM on outstanding bonds of the company. So, the YTM on the bonds currently sold in the market is: P = $1,517.15 = $60.5(PVIFAR%,38) + $1,000(PVIFR%,38) Using a spreadsheet, financial calculator, or trial and error we find: R = 3.55% This is the semiannual interest rate, so the YTM is: YTM = 2 3.55% = 7.1%

2. Tesla Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 12-year zero coupon bonds to raise the money. The required return on the bonds will be 10.6 percent. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16)) a. These bonds will sell for $ at issuance. b. Using the IRS amortization rule, Tesla Corporation can take an interest deduction of $

in the first

year and $ in the last year. c. Using the straight-line method for interest deduction, Tesla Corporation can take an annual interest deduction of $ . d. Tesla Corporation will prefer the straight-line method for interest deduction.
Explanation:

The price of a zero coupon bond is the PV of the par, so:

a.

P0 = $1,000/1.05324 = $289.55
b.

In one year, the bond will have 11 years to maturity, so the price will be: P1 = $1,000/1.05322 = $321.05 The interest deduction is the price of the bond at the end of the year, minus the price at the beginning of the year, so: Year 1 interest deduction = $321.05 289.55 = $31.51 The price of the bond when it has one year left to maturity will be: P11 = $1,000/1.0532 = $901.87 Year 11 interest deduction = $1,000 901.87 = $98.13

c.

Previous IRS regulations required a straight-line calculation of interest. The total interest received by the bondholder is: Total interest = $1,000 289.55 = $710.45 The annual interest deduction is simply the total interest divided by the maturity of the bond, so the straight-line deduction is: Annual interest deduction = $710.45 / 12 = $59.2
d.

3. The company will prefer straight-line methods when allowed because the valuable interest deductions occur earlier in the life of the bond. Staind, Inc., has 10 percent coupon bonds on the market that have 16 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 6 percent, the current bond price is $ the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))
Explanation:

. (Do not include

The price of any bond is the PV of the interest payment, plus the PV of the par value. Notice this problem assumes an annual coupon. The price of the bond will be: P = $100({1 [1/(1 + 0.06)]16 } /0.06) + $1,000[1 / (1 + 0.06)16 ] = $1,404.24

4. Kiss the Sky Enterprises has bonds on the market making annual payments, with 14 years to maturity, and selling for $972.22. At this price, the bonds yield 11.1 percent. The coupon rate on the bonds is (Do not include the percent sign (%). Round your answer to 1 decimal place. (e.g., 32.1))
Explanation:

percent.

Here we need to find the coupon rate of the bond. All we need to do is to set up the bond pricing equation and solve for the coupon payment as follows: P = $972.22 = C(PVIFA11.1%,14) + $1,000(PVIF11.1%,14) Solving for the coupon payment, we get: C = $107 The coupon payment is the coupon rate times par value. Using this relationship, we get: Coupon rate = $107 / $1,000 = 0.107 or 10.7%

5. Suppose the following bond quote for IOU Corporation appears in the financial page of today's newspaper. Assume the bond has a face value of $1,000 and the current date is April 15, 2009. The yield to maturity of the bond is percent and the current yield is Round your answers to 2 decimal places. (e.g., 32.16)) Company (Ticker) IOU (IOU)
Explanation:

percent. (Do not include the percent signs (%). EST Vol (000s) 1,827

Coupon 8.225

Maturity Apr 15, 2022

Last Price 77.055

Last Yield ??

The bond has 13 years to maturity, so the bond price equation is: P = $770.55 = $41.125(PVIFAR%,26) + $1,000(PVIFR%,26) Using a spreadsheet, financial calculator, or trial and error we find: R = 5.85% This is the semiannual interest rate, so the YTM is: YTM = 2 5.85% = 11.7% The current yield is the annual coupon payment divided by the bond price, so: Current yield = $82.25 / $770.55 = 0.1067 or 10.67%

6. Ashes Divide Corporation has bonds on the market with 16 years to maturity, a YTM of 7.2 percent, and a current price of $1,131.74. The bonds make semiannual payments. The coupon rate on these bonds must be

percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

Explanation:

Here we need to find the coupon rate of the bond. All we need to do is to set up the bond pricing equation and solve for the coupon payment as follows: P = $1,131.74 = C(PVIFA3.6%,32) + $1,000(PVIF3.6%,32) Solving for the coupon payment, we get: C = $43 Since this is the semiannual payment, the annual coupon payment is: 2 $43 = $86 And the coupon rate is the annual coupon payment divided by par value, so: Coupon rate = $86 / $1,000 Coupon rate = 0.086 or 8.6%

7. Ackerman Co. has 11 percent coupon bonds on the market with eight years left to maturity. The bonds make annual payments. If the bond currently sells for $1,157.8, the YTM is percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))
Explanation:

percent. (Do not include the

Here we need to find the YTM of a bond. The equation for the bond price is: P = $1,157.8 = $110(PVIFAR%,8) + $1,000(PVIFR%,8) Notice the equation cannot be solved directly for R. Using a spreadsheet, a financial calculator, or trial and error, we find: R = YTM = 8.23%

8. Grohl Co. issued 18-year bonds a year ago at a coupon rate of 10.5 percent. The bonds make semiannual payments. If the YTM on these bonds is 7.7 percent, the current bond price is $ the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))
Explanation:

. (Do not include

To find the price of this bond, we need to realize that the maturity of the bond is 17 years. The bond was issued one year ago, with 18 years to maturity, so there are 17 years left on the bond. Also, the coupons are semiannual, so we need to use the semiannual interest rate and the number of semiannual periods. The price of the bond is: P = $52(PVIFA4%,34) + $1,000(PVIF4%,34) = $1,262.98 9. Ngata Corp. issued 18-year bonds 2 years ago at a coupon rate of 10.6 percent. The bonds make semiannual payments. If these bonds currently sell for 100 percent of par value, the YTM is include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))
Explanation:

percent. (Do not

Here we are finding the YTM of a semiannual coupon bond. The bond price equation is: P = $1,000 = $53(PVIFAR%,32) + $1,000(PVIFR%,32) Since we cannot solve the equation directly for R, using a spreadsheet, a financial calculator, or trial and error, we find: R = 5.3% Since the coupon payments are semiannual, this is the semiannual interest rate. The YTM is the APR of the bond, so: YTM = 2 5.3% = 10.6%