Expected interest rate-best estimate of bonds remaining life

Assignment Help Financial Management
Reference no: EM131317385

Expected interest rate

Lourdes Corporation's 15% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 10 years, are callable 3 years from today at $1,025. They sell at a price of $1,247.30, and the yield curve is flat. Assume that interest rates are expected to remain at their current level.

A. What is the best estimate of these bonds' remaining life? Round your answer to two decimal places. years

B. If Lourdes plans to raise additional capital and wants to use debt financing, what coupon rate would it have to set in order to issue new bonds at par?

1. Since Lourdes wishes to issue new bonds at par value, the coupon rate set should be the same as the current yield on the existing bonds.

2. Since interest rates have risen since the bond was first issued, the coupon rate should be set at a rate above the current coupon rate.

3. Since the bonds are selling at a premium, the coupon rate should be set at the going rate, which is the YTC.

4. Since the bonds are selling at a premium, the coupon rate should be set at the going rate, which is the YTM.

5. Since Lourdes wishes to issue new bonds at par value, the coupon rate set should be the same as that on the existing bonds.

Reference no: EM131317385

Questions Cloud

New npv using variety of risk adjusted discount rates : The most recent example was the company decision whether to invest $50 Million in developing and implementing a new enterprise system to help manage resources and meet customer demand in the face of considerable technological and market uncertainty. ..
What is the expected stock price effect : What information is this announcement likely to convey, and what is the expected stock-price effect, as the market assimilates this information?
How many steps do we save by using maximal parallelism : If instead of maximizing the parallelism, we minimized the number of registers, how many steps would the computation take? How many steps do we save by using maximal parallelism?
Required return exceed required return : Beale Manufacturing Company has a beta of 2.2, and Foley Industries has a beta of 0.45. The required return on an index fund that holds the entire stock market is 12%. The risk-free rate of interest is 4.5%. By how much does Beale's required return e..
Expected interest rate-best estimate of bonds remaining life : Lourdes Corporation's 15% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 10 years, are callable 3 years from today at $1,025. They sell at a price of $1,247.30, and the yield curve is flat. What is the best estimate of these..
Compare strikes-boycotts and work stoppages : Design a training workshop to teach upper management about collective bargaining.Research the Internet and University Library for information on the role of HR in collective bargaining and the topic of collective bargaining.
What does negative lateness mean : What does "negative lateness" mean? Which of the following is not an example of a method that can be used to reduce the time to complete an activity? What can be used to display graphically the scheduled times for activities?
Percentage increase in pretax operating cash flow : Cash Flow DOL: For the Vinyl CD Co. in question 5, what percentage increase in pretax operating cash flow will be driven by the additional revenue?
Calculate r and r2 standard error of the estimate : Use the information regarding John's fishing trips to perform a simple (bivariate) regression analysis. Use the hours spent as the X variable, and the number of fish caught as the Y variable.  Calculate r and r2, standard error of the estimate, and a..

Reviews

Write a Review

 

Financial Management Questions & Answers

  Increase production at a rate-currently producing

Cooling Tools, Inc. is currently producing 1,436 of small refrigerators per month but the company's CEO plans to increase production at a rate of 5.20 % per month until the firm is producing 6.449 of refrigerators per month. How many months will this..

  What is the worth of this deal to the player

In 2011, a running back signed a contract worth $70.9 million. The contract called for $11.5 million immediately and a salary of $4.3 million in 2011, $11.1 million in 2012, $11.5 million in 2013, $10.2 million in 2014 and 2015, and $12.1 million in ..

  About the nonconstant growth

Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Microtech to begin paying dividends, beginning with a dividend of $0.75 coming 3 years from toda..

  Employment growth to raise the market price of stocks

After rallying for most of February to reach record highs in the month, the s&p 500 stock index fell sharply on Friday march 6 following news that the economy added 295,000 jobs, bringing the unemployment rate down to 5.5%. Analysts were expecting jo..

  Calculate the price of share-pe ratio-market-to-book ratio

Consider two all-equity financed firms (Bright Prospect and Past Glory), both with book value per share of $10, both with market capitalization rate of 15% and earning retention ratios of 0.6. Bright Prospect has an ROE of 20%. Calculate the price of..

  None of the original shares have been sold or redeemed

Three years ago, an ETF was initiated with 1 million shares in 10 stocks each with a market value of $10. The total market value of the ETF was then $100 million (1 million shares * 10 stocks * $10). The ETF issued 20 million shares which originally ..

  The notional values of trading volume and open interest

Consider the widget exchange. Suppose that each widget contract has a market vaule of $0 and a notional value of $100. There are three traders, A, B, and C. Over one day the following trades occur: what is each traders net position in the contract at..

  Financial security that guarantees to pay

Angela is offered to buy a financial security that guarantees to pay $30 every 3 years. The annual interest rate is 9%. Calculate and explain in words all calculations for the following: How much would Angela pay for it today if the first payment wil..

  Use the hamada equation to find unlevered beta

Harley Motors has $17 million in assets, which were financed with $3.4 million of debt and $13.6 million in equity. Harley's beta is currently 1.85 and its tax rate is 35%. Use the Hamada equation to find Harley's unlevered beta, bU.

  Raising funds for major investment

You are the CFO of ADP and you are raising funds for a major investment. Your strategy is to issues bonds of varying maturities to investors. One of the longer term bonds being issued can be purchased for $25,000.00 per bond and pays $1,900.00 annual..

  Interest rate risk

Both Bond Bill and Bond Ted have 7 percent coupons, make semi-annual payments, and are priced at par value. Bond Bill has 3 years to maturity, whereas Bond Ted has 20 years to maturity. If interest rates suddenly rise by 2 percent, what is the percen..

  What is the market value of the company debt

Bennington Industrial Machines issued 137,000 zero coupon bonds six years ago. The bonds originally had 30 years to maturity with a yield to maturity of 6.7 percent. What is the price of the bonds? What is the market value of the company's debt? If t..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd