QUESTION 1. You are considering an investment in the bonds of a company. The bonds which pay interest semiannunally, will mature in 8 8 years and have coupon rates of 9.5%. Currently the bonds are selling for $872.
a) If your require rate of return is 11% for bond in the risk class, what is the highest price you would be willing to pay for these bonds usin the PV function?
b) What is the yield to maturity of these bonds if you purchase them at the current price?
c) If the bonds can be called in three years with a call premium of 4% fo the face value, what is the yield to call on these bonds?
d) Assuming that settlement date for your purchase is the day you are solving this problem, the maturity date is 11/15/2013 and the fist call date is 11/15/2008, recalculate your answers to part a), b), and c) above using price and yield functions.
e) If the market rates increase substantially, do you think it is likely that the bond will be called in 3 years? why or why not?
f) Create a chart that shows the relationship bw the bonds price and your required returns.
QUESTION 2: Competition in the motor industry has never been better for consumers. Ford Motor Company has just started a WILMA 2005 Special discounts for victims of Hurricane Wilma. To qualify, you must have proof of residence in South Florida- from Monroe County in the south to Orange County in the north. Buyers must choose one of two available options on any of Ford's 2005 and 2006 models:
a) 2.9% financing for 60 months with or without down payment.
b) $5,000 cash back from Ford on the original value.
Suzie Goodtaste has only a couple of scratches on her 98 Nissan Maxima but decides to take advantage of the offer; who cares, she has proofs of residence in Pompano Beach. After consultations with her new, flamboyant boyfriend she gets some strong verbal support. They settle on the Premium Mustang Convertible, which cost $27,000. The good news is she can scrap the damaged Maxima "AS IS" for $2,000 and use the proceeds as down payment for the new car; the bad new, she has no good credit. If she chooses the cash back option (option b), she will have to borrow the remaining amount from Atlantic Credit Union at 7.9% APR for 60 months. What will Suzie's monthly payment schedule look like under each option? What advise would you give Suzie if her opportunity cost is 7.9%?
Please help as much as possible with explaing and showing me the steps to these two problems.