Annie's Investment In Atelier's Bonds
Call price =$1,080 BO = [I + 2] x PVIFA (8%/2, 25 x 2 yrs) + M x PVIF (8%/2, 25 x 2 yrs.)
Call price = Face value+ interest (Extra payment to the bond holder)
Interest Income = Call Price - Face Value = $1,080 - $1,000 = $
After 5 years, Stock price = $ (30 x 50) = $1,500 If she sells the stock at the end of the 5 the year, then she will get income from sale of Stock = $ (1500-1000) = $500. Therefore, at the end of 5th year, Stock price will be greater than the Call Price and as such, the can convert the bonds into common stock.
Converting the bonds is a safe option for Annie since common stock is a safe, income-producing alternative to bonds. While convertible bonds give up some of the upside of a stock, the dividend component and the reduced volatility make them attractive investments for retirement accounts and accounts with a need for taxable income.
Question B
A. When RRR = 6%,
BO = I x PVIFA (6%, 25 yrs) + M x PVIF (6%, 25 yrs)
= 80 + 12.783 + 1000 x
= $1,255.64
B. When RRR = 8%,
BO = I x PVIFA (8%, 25 yrs) + M x PVIF (8%, 25 yrs)
= 80 + 10.675 + 1000 x 0.146
= $1,000
C. When RRR = 10%
BO = I x PVIFA (10%, 25 yrs) + M x PVIF (10%, 25 yrs)
= 80 + 9.077 + 1000 x 0.092
= $818.16
Coupon Interest Rate (CIR)
Required Rate of Return (RRR)
BO
Par Value
Analysis
Decision
8%
6%
$1,255.64
$1,000
RRRCIR
Discount
Question C
A. BO = [I + 2] x PVIFA (6%/2, 25 x 2 yrs) + M x PVIF (6%/2, 25 x 2 yrs.)
= 40 x 21.482 + 1000 x 0.141
= $1,000.28
C. BO = [I + 2] x PVIFA (10%/2, 25 x 2 yrs) + M x PVIF (10%/2, 25 x 2 yrs.)
= 40 x 18.256 + 1000 x 0.087
= $817.24
Annually
RRR
Semi-Annually
$1,255.64
6%
1,257.20
$1,000
8%
1,000.28
$818.16
10%
Question D
For solving this problem, it is essential that Fisher's Effect on the RRR is first taken into consideration since the correlation between RRR and inflation is not given in the case study. According to Fisher's Effect, there is a relationship between real rates, nominal rates and inflation. The Effect is given as; (1 + R) = (1 + r) (1 + h) whereby R. is the nominal rate, r is the real rate while h is the expected inflation rate.
In this regard, the coupon rate is given as 8%; so, the real rate = (8-5) % = 3%. Therefore, the inflation rate of return is calculated as shown below.
R = (1 + 0.03) x (1 +0.06) -- 1 = 9.18%
BO = I x [(1+ ?) ? - 1?
x (1+ ?) ?] + M x [1 + (1 + ?) ?]
= $80 [(1 + 0. 0918)25-1-0.0918 x (1+.0918)25] + $1,000 [1? (1 + 0.0918)25]
= 718.8979 -- 97.8891 + 111.2814
= $732.2902
For Annie's case, calculating the amount to pay for the bond is essential without which, the inflation may eat into her investment leaving her without any income. Besides, it is a common tradition for investors to calculate the amount…