Solutions Guide: Please do not present as your own. I sometimes post solutions that are totally mine, from the book’s solutions manual, or a mix of my work and the books solutions manual. But this is only meant as a solutions guide for you to answer the problem on your own. I recommend doing this with any content you buy online whether from me or from someone else.

8. If you purchased a zero coupon bond today for $225 and it matures at $1,000 in 11 years, what rate of return will you earn on that bond (to the nearest 1/10 of 1 percent)?

Po = M/(1 + kd)n

= M(PVIFkd,n)

n = 11 Po = $225 M = $1000

$225 = $1,000(PVIFkd,11)

(PVIFkd,11) = 0.225

From Table II, this present value interest factor (in the 11-year row) lies between the value in the 14% and 15% columns.

Interpolation yields:

kd = 14% + [(0.237 - 0.225)/(0.237 - 0.215)](15% - 14%)

= 14.5% or 14.52% (by calculator)

10. Determine the value of a share of DuPont Series A $3.50 cumulative preferred stock to an investor who requires the following rates of return: a. 9% b.10% c.12%

a. P0 = Dp/kp

Dp = $3.5 kp = 0.09

P0 = $3.5/0.09 = $38.89

b. Dp = $3.5 kp = 0.10

P0 = $3.5/0.10 = $35.

c. Dp = $3.5 kp = 0.12

P0 = $3.5/0.12 = $29.17

11. Determine the value of a share of DuPont Series A $4.50 cumulative preferred stock, no par, to an investor who requires a 9% rate of return on this security. The issue is callable at $120 per share plus accrued dividends. However, the issue is not expected to be called at any time in the foreseeable future.

P0 = Dp/kp

Dp = $4.50; kp = 0.09

P0 = $4.50/0.09 = $50

19. Zeheng, issued $100 million of 15% coupon rate bonds in January 2005. The bonds had an initial maturity of 30 yrs. The bonds were sold at par and were callable in 5 yrs at 110. It is now January 2010, interest rates have declined such that bonds of equivalent remaining maturity now sell to yield 11%. How much you be willing to pay?Why

Maximum value:

P0 = $150(PVIFA.11,25) + $1000(PVIF.11,25)

= $1337

Value at call = $1,1000

You would pay $1,100 or perhaps a slight premium over that amount, but nowhere near $1,337, due to the imminent risk of a call of the bonds