Chapter 5

P2)
You are considering two ways of financing an Easter holiday. You could put it
on your credit card, at 15% APR, compounded monthly, or borrow the money
from your parents, who want an 8% interest payment every 6 months. Which
is the lower rate?

x*(0.15/2) =
x*0.08=
Let x = $1000
1000*(0.15/2)=$75
1000*(0.08)=$80

Therefore the APR rate is a lower rate.

P)9
You make monthly payments on your car loan. It is quoted APR of 6% (monthly
compounding). What percentage of the outstanding principal do you pay in
interest each month?

0.06/12
=0.5%

P)23
The mortgage on your house is five years old. It required monthly payments of
$1402, had an original term of 30 years and had an interest rate if 9% (APR). In
the intervening 5 years, interest rates have fallen so you have decided to
refinance – that is, you will roll over the outstanding balance into a new
mortgage. The new mortgage has a 30 year term, requires monthly payments,
and has an interest rate of 5.625% (APR).

a) What monthly repayments will be required with the new loan?

Previous mortgage amount=$1402x30x12x(1+0.09/12)
=$508505.4

Already paid amount=$1402x12x5

=$84120

Mortgage left to pay=$424385.40

New monthly payment=$424385.40x1+(0.05625/12)/30/12
=$11284.37

b) If you still want to pay off the mortgage in 25 years, what monthly
payments should you make after you refinance?
c) Suppose you are willing to continue making monthly payments of $1402.
How long will it take you to pay off the mortgage after refinancing?
d) Suppose you are willing to continue making monthly payments of $1402,
and want to pay off the mortgage in 25 years. How much additional cash
can you borrow today as part of refinancing?

Chapter 6

P)2
Assume that a bond will make payments ever six months as shown on the
following timeline (using 6 month periods):
a) What is the maturity of the bond (in years)?
10 years
b) What is the coupon rate (in per cent)?
($20x2)/1000=0.04
=4%

c) What is the face value?

$1000

P)9
The yield to maturity of a $1000 bond with a 7% coupon rate, semi-annual
coupons and two years to maturity is 7.6% APR, compounded semi-annually.
What must it’s price be?

P)14
You have purchased a 10% coupon bond for $1040. What will happen to the
bond’s price if market interest rates rise?

P)15
Suppose a seven-year, $1000 bond with an 8% coupon rate and semi-annual
coupons is trading with a yield to maturity of 6.75%.
 a) If this bond is currently trading at a discount, at par or at a premium?
Explain.
b) If the yield to maturity of the bond rises to 7% (APR with semi-annual
compounding), what price will the bond trade for?

P)19
Your company has $1000 par, 6% coupon bonds with 10 years to maturity and
a price of $1078. If you want to issue new 10-year coupon bonds at par, what
coupon rate do you need to set? Assume that for both bonds, the next coupon
payment is due exactly in 6 months?

P)22
Which of the bonds A-D (using textbook table) is most sensitive to a 1% drop in
interest rates from 6% to 5%, and why? Which bond is least sensitive? Provide
an intuition explanation with your answer.

P)25
Jackson industries is contemplating issuing a 30 year bond with a coupon rate
of 7% (annual coupon payments) and a face value of $1000. Jackson believes it
can get a rating of A from Standard & Poor’s. However, due to recent financial
difficulties at the company, Standard & Poor’s is warning that it may
downgrade Jackson Industries bonds to BBB. Yields on A-rated bonds are
currently 6.5% and yields on BBB-rated bonds are 6.9%
a) What is the price of the bond if Jackson Industries maintains the A rating
for the bond issue?
b) What will the price of the bond be if it is downgraded?

P)26
Marlite Engineering would like to raise $10 million to invest in capital
expenditures. The company plans to issue five-year bonds with a face value of
$1000 and a coupon rate of 6.5% (annual payments). The following table
summarises the yield to maturity fo five-year (annual-pay) coupon corporate
bonds of various ratings:
a) Assuming the bonds will be rated AA, what will be the price of the
bonds?
b) How much of the total principal amount of these bonds must Marlite
issue to raise $10 million today, assuming the bonds are AA rated?
(Because Marlite cannot issue fraction of a bond, assume that all
fractions are rounded to the nearest whole number).
c) What must the rating of the bonds be for them to sekk at par?
d) Suppose that when the bonds are issued, the price of each bond is
$959.54. What is the likely rating of the bonds? Are they junk bonds?