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Forst Hill Paper Company Case

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Submitted By ftrainor
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Q7-1) The YTM is the interest rate the market requires for a bond. The coupon rate is the annual coupon divided by the face value of the bond. The coupon rate will remain the same. If the bond is issued with a 8% coupon rate but the YTM is 10% the bond will still have an 8% coupon rate it would just be sold at a discount because the price of the $1,000 bond has now decreased to match the 10% YTM.

Q7-4)

Original Bond:

Present Value: $1,000/1.09(9)=$460.43

Annuity Present Value: $90 x (1-1/1.09(9))/.09

=$90 x (1-1/2.171893279)/.09

=$90x5.995246893

=$539.57

=$460.43 + $539.57 = $1,000

Bond currently sells for $934 so we will try using a 10% YTM.

$1,000/1.10(9) = $424.10

= $90 x (1-1/1.10(9)/.10

=$90 x (1-1/2.357947691)/.10

=$90 x 5.759023816

=$518.31

= $424.10 + $518.31

= $942.41 – so it is not 10%

Trying 11%

$1,000/1.11(9) = $390.92

=$90 x (1-1/1.11(9)/.11

=$90 x (1-1/2.558036924)/.11

=$90 x 5.537047532

=$498.33

=$390.92 + $498.33

=$889.25 so it is not 11%.

Trying 10.5%

$1,000/1.105(9) = $407.14

=$90 x (1-1/1.105(9)/.105

=$90 x 5.646323879

=$508.17

=$407.14 + $508.17

=$915.31

Trying 10.25%

$1,000/1.1025(9) = $415.52

=$90 x (1-1/1.1025(9)/.1025

=$90 x 5.702237514

=$513.20

=415.52 + $513.20 = $928.72

Trying 10.2%

$1,000/1.102(9) = $417.22

=$90 x (1-1/1.102(9)/.102

=$90 X 5.713524415

=$514.22

=$417.22 + $514.22 = $931.44

The YTM is approximately 10.2%

Q7-6) The current bond rate for Grohl Co with a YTM of 7.4% is:

$1,000/1.074(10) = $489.73

=$69 x (1-1/1.074(10)/.074

=$69 x 6.895533265

=$475.79

The current bond price is $489.73 + $475.79 = $965.52

Q8-1) Pˇ0=Dˇ1/(R-g)=Dˇ0x(1+g)/(R-g)

=$1.95x1.06/(.11-.06)

=$2.067/.05

=$41.34 is the current price

Price in

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