Chapter 14, Problem 4SE

The investment manager for Draxler Co. pays $988,472 to purchase a $1,000,000 face-value bond maturing in five years and paying interest semiannually at an annual rate of 2.75 percent. The annual market rate for comparable bonds at the time of issuance is 3.00 percent. With two years remaining, the manager determines that the bond will pay the full $1,000,000 at maturity but will pay $3,000 less in interest than planned every six months for the remainder of the bond’s life. The relevant present value factors for $1 and a $1 ordinary annuity are 0.9422 and 3.8544, respectively. If the bond’s current fair value with two years remaining is $994,800 and the amortized cost of the bond is $995,182, the current expected credit loss, assuming that the bond is classified as held-to-maturity, is closest to: A. $4,835 B. $6,710 C. $11,165 D. $11,545

Stan Moneymaker has the opportunity to purchase a certain U.S. Treasury bond that matures in eight years and has a face value of $10,000. This means that Stan will receive $10,000 cash when the bond’s maturity date is reached. The bond stipulates a fixed nominal interest rate of 8% per year, but interest payments are made to the bondholder every three months; therefore, each payment amounts to 2% of the face value. Stan would like to earn 10% nominal interest (compounded quarterly) per year on his investment, because interest rates in the economy have risen since the bond was issued. How much should Stan be willing to pay for the bond?

The Florida Investment Funds buys 58 bonds of the Gator Corp. through a broker. The bond pays 10 percent annual interest. The Yield to Maturity (market rate of interest) is 12 percent. The bonds have a 10-year maturity. Calculate your final answer using the formula and financial calculator methods. Using an assumption of semiannual interest payments: a) Compute the price of a bond (Do not round intermediate calculations and round your answer 2 decimal places. b) Compute the total value of 58 bonds (Do not round intermediate calculations and round your answer 2 decimal places).