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Due Date: May 11, 2021

Instruction: answer all questions and show workings

  1. The Pennington Corporation issued a new series of bonds on January 1, 1987. The bonds were sold at par ($1,000), had a 12% coupon, and matured in 30 years on December 31, 2016. Coupon payments are made semiannually (on June 30 and December 31).
  1. What was the Yield To Maturity (YTM) on the date the bonds were issued? 4 Marks
  2. What was the price of the bonds on January 1, 1992 (5 years later) assuming that interest rates had fallen to 10%? 4 Marks
  3. On July 1, 2010 (6.5 years before maturity), Pennington’s bonds sold for $916.42. What are the YTM and the current yield for that date? 2 Marks
  4. How does one determine the value of any asset whose value is based on expected future cash flows? 2 Marks
  5. How is the value of a bond determined? What is the value of a 10-year, $1,000 par value bond with a 10% annual coupon if its required rate of return is 10%? 4 Marks

Question 2

Find the present values of the following cash flow streams. The appropriate interest rate is 10%.

Year Cash Stream X Cash Stream Y

1 $100 $300

2 800 400

3 400 400

4 400 400

5 300 800

5 marks each = 10 marks

A. Find the interest rate if you borrow $700 and promise to pay back $2800 at the end of 3 years.

B. Find the number of years if you invest $800 today and it grow $1600 at a rate of 10%

4 Marks

Total 30 Marks

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