Fundamentals of Corporate Finance
Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 5, Problem 9CRCT
Summary Introduction

To critically think about: The price of the security issued by the Treasury

Introduction:

The time value of money implies that the cash in hand at present has a higher value than the cash receipt promised in the future. Hence, a person needs more money in the future to buy the same product at present.

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In March 2018, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $5,000 in March 2053, but investors would receive nothing until then. Investors paid DMF $820 for each of these securities; so they gave up $820 in March 2018, for the promise of a $5,000 payment 35 years later. a. Assuming you purchased the bond for $820, what rate of return would you earn if you held the bond for 35 years until it matured with a value $5,000? (Do not round intermediate calculations and enter your answer as a percent, rounded to 2 decimal places, e.g., 32.16.) b. Suppose under the terms of the bond you could redeem the bond in 2028. DMF agreed to pay an annual interest rate of 1.3 percent until that date. How much would the bond be worth at that time? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. In 2028, instead of cashing in the bond…
In March 2020, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $1,000 in March 2045, but Investors would receive nothing until then. Investors pald DMF $440 for each of these securities; so they gave up $440 in March 2020, for the promise of a $1,000 payment 25 years later. a. Assuming you purchased the bond for $440, what rate of return would you earn if you held the bond for 25 years until it matured with a value $1,000? Note: Do not round Intermediate calculations and enter your answer as a percent, rounded to 2 decimal places, e.g., 32.16. b. Suppose under the terms of the bond you could redeem the bond in 2030. DMF agreed to pay an annual Interest rate of 1.5 percent until that date. How much would the bond be worth at that time? Note: Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. c. In 2030, instead of cashing in…
Rust Bucket Motor Credit Corporation (RBMCC), a subsidiary of Rust Bucket Motor, offered some securities for sale to the public on March 28, 2,009. Under the terms of the deal, RBMCC promised to repay the owner of one of these securities $112,564 on March 28, 2,038, but investors would receive nothing until then. Investors paid RBMCC $28,904 for each of these securities; so they gave up $28,904 on March 28, 2,009, for the promise of a $112,564 payment in 2,038. Based on the $28,904 price, what rate was RBMCC paying to borrow money?
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