Case Problem II. Heinz Corporation bonds carry a coupon of 8% and will mature in
ID: 2680996 • Letter: C
Question
Case Problem II.Heinz Corporation bonds carry a coupon of 8% and will mature in 5 years at $1,000. Newly issued 5-year bonds with similar characteristics are yielding 4%. Calculate today's market price of the Heinz bond. Compute your answer, submit all your work, then answer the following questions.
14. What is the discount rate you used in your work ?
15. What is the annual interest in dollars paid by the Heinz bond ?
16. What is the pv of the yearly bond interest that the Heinz bond pays ? Could this yearly bond interest be computed as an annuity ? Why,or why not ?
17.What is the present value of the principal of the Heinz bond ?
18, What is the total present value of the Heinz bond- interest plus principal ?
Explanation / Answer
14.discount rate= 4% 15.annual interest= $80 16. 80x4.4518= $356.144. Yes this can be computed as annuity because this occurs every year for the next 5 years. 17. present value of the principal= 1000x.8219= $821.9 18. Total PV= 80PVIFA(4%,5)+1000PVIF(4%,5) =(80x4.4518)+(1000x.8219) =$1178.044