I need the answers to Minicase 7 for Chapter 7 Foundations of Finance 7th editio
ID: 2628245 • Letter: I
Question
I need the answers to Minicase 7 for Chapter 7 Foundations of Finance 7th edition (Keown, Martin, Petty) Please explain.
Here are data on $1,000 par value bonds issued by Microsoft, Ford, and Xerox at the end of 2008. Assume you are thinking about buying these bonds as of January 2009. Answer the following questions:
a.) Calculate the values of the bonds if your required rates of return are as follows: Microsoft, 6 percent; Ford, 15 percent; Xerox, 10 percent; where
coupon of interest Microsoft-5.25% Ford-7.125% Xerox-8.0%
Years to maturity Microsoft-30 Ford-25 Xerox-16
b.) At the end of 2008, the bonds were selling for the following amounts:
Microsoft $1,009.00
Ford $610.00
Xerox $805.00
What were the expected rates of return for each bond?
c.) How would the value of the bonds change if (1) your required rate of return (rb) increased 2 percentage points or (2) decreased 2 percentage points?
d.) Explain the implications of your answers in part b in terms of interest rate risk, premium bonds, and discount bonds.
e.) Should you buy the bonds? Explain.
Explanation / Answer
I dont have book. Here is what I solved before. Please substitute the figures as per your question. Let me know if you want some clarification on it. Please rate 5 stars if I succeeded in helping you.
7-10. (Bond valuation) You own a bond that pays $70 in annual interest, with a $1,000 par value. It matures in 15 years. Your required rate of return is 7 percent.
a. Calculate the value of the bond.
b. How does the value change if your required rate of return (1) increases to 9 percent or (2) decreases to 5 percent?
c. Explain the implications of your answers in part (b) as they relate to interest rate risk, pre- mium bonds, and discount bonds.
d. Assume that the bond matures in 5 years instead of 15 years.
Recompute your answers in part (b). e. Explain the implications of your answers in part (d) as they relate to interest rate risk, pre- mium bonds, and discount bonds.
a) Price = present value of future vash flows
Price = 70/(1+7%) + 70/(1+7%)^2 ......................70/(1+7%)^15 + 1000/(1+7%)^15
price = 70*(1-1/1.07^15)/7%+ 1000/(1+7%)^15= $1000
b) 1) (1) increases to 9 percent
price = 70*(1-1/1.09^15)/9%+ 1000/(1+9%)^15=$838.79
(2) decreases to 5 percent
price = 70*(1-1/1.05^15)/5%+ 1000/(1+5%)^15=$1,207.59
c. As the required rate of return increases, value of bond decreases and vice versa
required rate of return is 7 percent - par bond
required rate of return is 9 percent - discount bond
required rate of return is 5 percent - premium bond
d.
d) 1) (1) increases to 9 percent
price = 70*(1-1/1.09^5)/9%+ 1000/(1+9%)^5=$922.21
(2) decreases to 5 percent
price = 70*(1-1/1.05^5)/5%+ 1000/(1+5%)^5=$1086.59
As the required rate of return increases, value of bond decreases and vice versa
but the variation is less if the maturity period is less
If maturity period is high than there is more risk with the changes in interest rate.