Activity Instructions

Your assignment for this week is to answer the following questions based on the scenario below. Please be sure to show your work. There are ten questions in this assignment, some with multiple sections. The assignment is worth 90 points and all questions are equally weighted.

Robert Black and Carol Alvarez are vice presidents of Western Money Management and codirectors of the companys pension fund management division. A major new client, the California League of Cities, has requested that Western present an investment seminar to the mayors of the cities represented by the league. Black and Alvarez, who will make the presentation, have asked you to help them by answering the following questions:

1. What are a bonds key features?
2. What are call provisions and sinking fund provisions? Do these provisions make bonds more or less risky?
3. How is the value of any asset whose value is based on expected future cash flows determined?
4. How is a bonds value determined? What is the value of a 10-year, $1,000 par value bond with a 10% annual coupon if its required return is 10%?
5. What is the value of a 13% coupon bond that is otherwise identical to the bond described in question 4? Would we now have a discount or a premium bond?
6. What is the value of a 7% coupon bond with these characteristics? Would we now have a discount or premium bond?
7. What would happen to the values of the 7%, 10%, and 13% coupon bonds over time if the required return remained at 10%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N; then, change (override) N to see what happens to the PV as it approaches maturity.)
8. What is the yield to maturity on a 10-year, 9% annual coupon, $1,000 par value bond that sells for $887.00? What is the yield on the same bond if it sells for $1,134.20?
9. What is the total return, the current yield, and the capital gains yield for the discount bond? Assume that it is held to maturity, and the company does not default on it. (Hint: Refer to footnote 6 for the definition of the current yield and to Table 7.1.)
10. Suppose a 10-year, 10% semiannual coupon bond with a par value of $1,000 is currently selling for $1,135.90, producing a nominal yield to maturity of 8%. However, it can be called after four years for $1,050. What is the bonds nominal yield to call (YTC)?

Tips for Success

• Please dont forget to adjust N, I/Y, and PMT according to compounding frequency. If a 10 year bond makes the coupon payments quarterly, the annual coupon payment is evenly split and paid every three months. For example, if the coupon rate is 12%, the investor receives four payments of $30 every three months. In this case: N=10X4, I/Y=12/4, and PMT=30.

Writing and Submission Requirements

• Your answers should be for someone who is intelligent but is not an expert in finance. If you use jargon, please explain what it means. Label your answers clearly.
• You must respond to the questions assigned using complete sentences.