1. A recent Powerball jackpot was announced at $380 million payable in 30 equal annual payments over 29 years. The winner has the option of receiving 1/30th of the jackpot each year, starting immediately, or a lump sum cash option of $256.8 million. What rate of discount was used to calculate the value of the cash option?
2. A convertible bond with a par value of $1,000 has a conversion ratio of 40. The bond is currently approaching maturity and the company’s stock price is $29.50. a.) Would you convert? b.) Why?
3. Tamarind, Inc. has a bond outstanding with the following characteristics:
Face value: $1,000
Years to maturity: 15
Coupon rate 5.25%
Yield to maturity 4.95% (6%)
a. Does this bond sell at a premium or a discount to face value?
b. A US Treasury bond maturing in 15 years has a YTM of 1.95%. What is the spread of Tamarind’s bond?
c. At the time Tamarind issued its bond, the YTM on a T-bond maturing at the same time as Tamarind’s was 4.25%. Tamarind’s bond was issued at par. What was Tamarind’s spread at the time of issuance? What does this information suggest about Tamarind’s financial condition today?