Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates change from 8 to 6% the bond's pric
1 answer:
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Answer:
a) 28%
b) 56%
Explanation:
Data provided in the question:
Operating profit margin = 7%
Asset turnover ratio = 4
Now,
a) ROA = Profit margin × Asset turnover ratio
= 7% × 4
= 28%
b) Given:
Debt-equity ratio = 1
Interest payments = $8,200
Taxes = $8,200
EBIT = $21,000
Now,
Total assets = Net income ÷ ROA
Also,
Net income = EBIT - tax - interest
= $21,000 - $8,200 - $8,200
= $4,600
Thus,
Total assets = $4,600 ÷ 28%
= $16428.57
also,
Total assets = Debt + Equity
or
Total assets = Equity × (
)
or
$16428.57 = Equity × ( 1 + 1 )
or
=> Equity = $8214.28
Therefore,
ROE = Net income ÷ Equity
= $4,600 ÷ $8214.28
= 56%
Answer:
Bond Price = $86409.67366 rounded off to $86409.67
Explanation:
To calculate the price of the bond today, we will use the formula for the price of the bond. We assume that the interest rate provided is stated in annual terms. As the bond is a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,
Coupon Payment (C) = 100000 * 0.06 * 6/12 = $3000
Total periods (n) = 10 * 2 = 20
r or YTM = 0.08 * 6/12 = 0.04 or 4%
The formula to calculate the price of the bonds today is attached.
Bond Price = 3000 * [( 1 - (1+0.04)^-20) / 0.04] + 100000 / (1+0.04)^20
Bond Price = $86409.67366 rounded off to $86409.67
