You are considering an investment in the bonds of the Front Range Electric Company. The bonds pay interest semiannually, will mature in 15 years, and have a coupon rate of 6% on a face value of $1,000. Currently, the bonds are selling for $920. a. If your required return is 6.80% for bonds in this risk class, what is the highest price you would be willing to pay? (Use the Pv function.) What is the current yield of these bonds? What is the yield to maturity on these bonds if you purchase them at the cur- rent price? (Use the RATE function.) b. c. d. If you hold the bonds for one year, and interest rates do not change, what total rate of return will you earn, assuming that you pay the market price? Why is this different from the current yield and YTM? e. If the bonds can be called in three years with a call premium of 4% of the face value, what is the yield to call? (Use the RATE function.) f. Now assume that the settlement date for your purchase is 7/30/2020, the maturity date is 7/30/2035, and the first call date is 7/30/2023. Using PRICE and YIELD recalculate your answers to parts a, e, and d. g. If market interest rates remain unchanged, do you think it is likely that the bond will be called in three years? Why or why not? h. Create a chart that shows the relationship of the bond's price to your required return. Use a range of 0% to 15% in calculating the prices.
You are considering an investment in the bonds of the Front Range Electric Company. The bonds pay interest semiannually, will mature in 15 years, and have a coupon rate of 6% on a face value of $1,000. Currently, the bonds are selling for $920. a. If your required return is 6.80% for bonds in this risk class, what is the highest price you would be willing to pay? (Use the Pv function.) What is the current yield of these bonds? What is the yield to maturity on these bonds if you purchase them at the cur- rent price? (Use the RATE function.) b. c. d. If you hold the bonds for one year, and interest rates do not change, what total rate of return will you earn, assuming that you pay the market price? Why is this different from the current yield and YTM? e. If the bonds can be called in three years with a call premium of 4% of the face value, what is the yield to call? (Use the RATE function.) f. Now assume that the settlement date for your purchase is 7/30/2020, the maturity date is 7/30/2035, and the first call date is 7/30/2023. Using PRICE and YIELD recalculate your answers to parts a, e, and d. g. If market interest rates remain unchanged, do you think it is likely that the bond will be called in three years? Why or why not? h. Create a chart that shows the relationship of the bond's price to your required return. Use a range of 0% to 15% in calculating the prices.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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F, G, and H are needed.
Transcribed Image Text:1. You are considering an investment in the bonds of the Front Range Electric Company.
The bonds pay interest semiannually, will mature in 15 years, and have a coupon
rate of 6% on a face value of $1,000. Currently, the bonds are selling for $920.
a. If your required return is 6.80% for bonds in this risk class, what is the highest
price you would be willing to pay? (Use the Pv function.)
b. What is the current yield of these bonds?
c. What is the yield to maturity on these bonds if you purchase them at the cur-
rent price? (Use the RATE function.)
d. If you hold the bonds for one year, and interest rates do not change, what
total rate of return will you carn, assuming that you pay the market price?
Why is this different from the current yield and YTM?
If the bonds can be called in three years with a call premium of 4% of the
face value, what is the yield to call? (Use the RATE function.)
e.
f.
Now assume that the settlement date for your purchase is 7/30/2020, the
maturity date is 7/30/2035, and the first call date is 7/30/2023. Using PRICE
and YIELD recalculate your answers to parts a, c, and d.
If market interest rates remain unchanged, do you think it is likely that the
bond will be called in three years? Why or why not?
8.
h.
Create a chart that shows the relationship of the bond's price to your required
return. Use a range of 0% to 15% in calculating the prices.
Transcribed Image Text:A
В
D
E
Front Range Electric Company Bonds
1
2 Price
$
920.00
Settlement Date
7/30/2020
3 Face Value
$
1,000.00
Maturity Date
7/30/2035
4 Call Premium %
4.00%
Call Date
7/30/2023
5 Coupon Rate
6 Frequency
7 Maturity (Years)
8 Years to first call
9 Required Return
6.00%
2
15
3
6.80%
10
11 Value (a)
12 Current Yield (b)
13 One Year Total Return (d)
14 Yield to Maturity (c)
15 Yield to Call (e)
Value (a)
Current Yield (b)
One Year Total Return (d)
Yield to Maturity (c)
Yield to Call (e)
$925.5
6.48%
7.44%
6.86%
10.34%
16
17
18
19
20
21
Yield/Price Data
22
Yield
Price
23
0.00%
$1,900.00
24
1.00%
$1,694.85
25
2.00%
$1,516.15
26
3.00%
$1,360.24
27
4.00%
$1,223.96
28
5.00%
$1,104.65
29
6.00%
$1,000.00
30
6.80%
$925.50
31
7.00%
$908.04
32
8.00%
$827.08
33
9.00%
$755.67
34
10.00%
$692.55
35
11.00%
$636.66
36
37
12.00%
$587.06
13.00%
$542.95
38
14.00%
$503.64
39
15.00%
$468.53
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