Chapter 5 #28 Valuing Bonds - The Grimm Corporation has two different bonds currently outstanding.

The Grimm Corporation has two different bonds currently outstanding.

Bond M has a face value of 20k and matures in 20 years. The bond makes NO payments for the first SIX years, then pays 800 every SIX months over the subsequent EIGHT years, and finally pays 1000 every SIX months over the last six years. Bond N also has a face value 20k and a maturity of 20 years. It makes no coupon payments over the life of the bond. If the required return on both bonds is 5.9% compounded semianually, what is the current price of bond M and Bond N?


The key to solving this problem is to calculate the PV of each series of payments, then add them together. The payments for each six months are doubled in the PV formula.

The second bond is a simple PV calculation as there are no payments.

Finance Chapter 15 #6 Costs of Financial Distress - Steinberg Corporation and Dietrich Corporation are identical firms

Chapter 15

Excel File

#6
Steinberg Corporation and Dietrich Corporation are identical firms except Dietrich is more levered.

Chance of current expansion 80% (EBIT $2.9M)
Chance of recession 20% (EBIT $950k)
Steinberg Debt 825k
Dietrich Debt 1.3M
Discount rate 14%

Key points: Since Dietrich's debt is greater than recession EBIT, need to have a 0 (see formula C25)

Answer B is the sum of both market values (debt and equity) for each firm.

Holding Period Yield

Holding Period Yield

Excel File

You will earn the YTM on a bond if you hold the bond until maturity and if the interest rates do not change.

a. Suppose that today you buy a bond with an annual coupon rate of 5.5% for $865. The bond has 21 years to maturity. What rate of return do you expect/

b. Two years from now the YTM has declined by 1% and you decide to sell. What price will the bond sell for? What is the HPY on the investment?