solve WITHOUT FINANCIAL CALCULATOR OR EXCEL

8. Bond Yields. Use the chapter appendix to answer this problem.) Hankla Company plans to purchase either (1) zero-coupon bonds that have ten years to maturity, a par value of $100 million, and a purchase price of $40 million, or (2) bonds with similar default risk that have five years to maturity, a 9 percent coupon rate, a par value of $40 million, and a purchase price of $40 million. Hankla can invest $40 million for five years. Assume that the market's required return in five years is forecasted to be 11 percent. Which alternative would offer Hankla a higher expected return (or yield) over the five-year investment horizon? ANSWER: The PV of zero-coupon bonds five years from now is based on the PV of the par value to be received 5 years after that point in time: PV of Zero- Coupon Bonds 1 = $100,000,000(PVIF -11% - 5) = $100,000,000(.5935) = $59,350,000 The discount rate at which the anticipated cash flows from the zero-coupon bonds will equal today's price is: $40,000,000 - $59,350,000(PVIF-"-) (PVIF--3) = 6740 i = about 8%