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FIN3013 Lab #5.

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1 FIN3013 Lab #5

2 UTSA College of Business
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 UTSA College of Business
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 UTSA College of Business
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 Used to calculate the coupon payment Coupon Payment = Face Value X Coupon Rate UTSA College of Business FIN3013Lab

5 UTSA College of Business
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 UTSA College of Business
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 UTSA College of Business
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 UTSA College of Business
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 UTSA College of Business
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 UTSA College of Business
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 UTSA College of Business
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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