Fin610 homework 5

When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he lived. The week after she died in 1962, a bunch of fresh flowers that the former baseball player thought appropriate for the star cost about $8. Based on actuarial tables, “Joltin’ Joe” could expect to live for 30 years after the actress died. Assume that the EAR is 6.9 percent. Also, assume that the price of the flowers will increase at 3.2 percent per year, when expressed as an EAR. Assume that each year has exactly 52 weeks and Joe began purchasing flowers the week after Marilyn died.

What is the present value of this commitment? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Bond P is a premium bond with a 9 percent coupon. Bond D is a 5 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 7 percent, and have 10 years to maturity.(Do not round intermediate calculations.)

What is the current yield for Bond P and Bond D? (Round your answers to 2 decimal places. (e.g., 32.16))

Current yield

Bond P

%

Bond D

%

If interest rates remain unchanged, what is the expected capital gains yield over the next year for Bond P and Bond D? (Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))

Capital gains yield

Bond P

%

Bond D

%

Miller Corporation has a premium bond making semiannual payments. The bond pays a coupon of 8 percent, has a YTM of 6 percent, and has 13 years to maturity. The Modigliani Company has a discount bond making semiannual payments. This bond pays a coupon of 6 percent, has a YTM of 8 percent, and also has 13 years to maturity. (Do not round intermediate calculations.)

What is the price of each bond today? (Round your answers to 2 decimal places. (e.g., 32.16))

Price of Miller Corporation bond

$

Price of Modigliani Company bond

$

If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now? In 3 years? In 8 years? In 12 years? In 13 years? (Round your answers to 2 decimal places. (e.g., 32.16))

Price of bond

Miller Corporation Bond

Modigliani Company Bond

One year

$

$

Three years

$

$

Eight years

$

$

12 years

$

$

13 years

$

$