On April 1, 2014, Fredriksen Corp. sold a $700 million bond issue to finance the purchase of a newdistribution facility. These bonds were issued in $1,000 denominations with a maturity date of April1, 2034. The bonds have a coupon rate of 8.00% with interest paid semiannually. Required: a)Determine the value today April 1, 2024 of one of these bonds to an investor who requires a 12percent return on these bonds. Why is the value today different from the par value? b) Assume thatthe bonds are selling for $925.00. Determine the current yield and the yield-to-maturity. Explainwhat these terms mean. c) Explain what layers or textures of risk play a role in the determination ofthe required rate of return on Fredriksen's bonds.

Solution to question Bwe need to use a financial calculator to find out the yield- to- maturityn is…

Answered: On April 1, 2014, Fredriksen Corp. sold…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 3P

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Chung Inc. issued $50,000 of 3-year bonds on January 1, 2018, with a stated rate of 4% and a market rate of 4%. The bonds paid interest semi-annually on June 30 and Dec. 31. How much money did the company receive when the bonds were issued? The bonds would be quoted at what rate?
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On November 1, 2013, Matthew Corp. sold a $600 million bond issue to finance the purchase of a new distribution facility. These bonds were issued in $1,000 denominations with a maturity date of November 1, 2033. The bonds have a coupon rate of 8.00% with interest paid semiannually. Required: Determine the value today, November 1, 2023 of one of these bonds to an investor who requires a 10 percent return on these bonds. Why is the value today different from the par value? Assume that the bonds are selling for $870.00. Determine the current yield and the yield-to-maturity. Explain what these terms mean. Explain what layers or textures of risk play a role in the determination of the required rate of return on Matthew’s bonds. For each of the following events, explain what the impact would be on the yield-to-maturity: The bond is downgraded by a rating agency. The economy seems to be shifting from a recession to a boom economy. The bond is subordinated to other bonds. Congressional…
On January 1, 2024, Ithaca Corporation purchases Cortland Incorporated bonds that have a face value of $210,000. The Cortland bonds have a stated interest rate of 10%. Interest is paid semiannually on June 30 and December 31, and the bonds mature in 10 years. For bonds of similar risk and maturity, the market yield on particular dates is as follows: Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) January 1, 2024 11.0% June 30, 2024 12.0% December 31, 2024 14.0% Prepare all appropriate journal entries related to the bond investment during 2024, assuming that Ithaca chose the fair value option when the bonds were purchased, and that Ithaca determines fair value of the bonds semiannually. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds. 1. Record the investment in bonds with a face value of $210,000, a stated interest rate of 10% and a market…
On January 1, 2024, Ithaca Corporation purchases Cortland Incorporated bonds that have a face value of $330,000. The Cortland bonds have a stated interest rate of 5%. Interest is paid semiannually on June 30 and December 31, and the bonds mature in 10 years. For bonds of similar risk and maturity, the market yield on particular dates is as follows: Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) January 1, 2024 11.0% June 30, 2024 12.0% December 31, 2024 14.0% Required: 1-a. Calculate the price Ithaca would have paid for the Cortland bonds on January 1, 2024 (ignoring brokerage fees). 1-b. Prepare a journal entry to record the purchase. 2. Prepare all appropriate journal entries related to the bond investment during 2024, assuming Ithaca accounts for the bonds as a held-to-maturity investment. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds. 3.…
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