Question

General Matter’s outstanding bond issue has a coupon rate of 8.8%, and it sells

at a yield to maturity of 8.00%. The firm wishes to issue additional bonds to the public at face value. What coupon rate must the new bonds offer in order to sell at face value? (Enter your answer as a percent rounded to 2 decimal places.)

Consider three bonds with 6% coupon rates, all making annual coupon payments and all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has a maturity of 8 years, and the long-term bond has a maturity of 30 years.

a. What will be the price of the 4-year bond if its yield increases to 7%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. What will be the price of the 8-year bond if its yield increases to 7%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

c. What will be the price of the 30-year bond if its yield increases to 7%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

d. What will be the price of the 4-year bond if its yield decreases to 5%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

e. What will be the price of the 8-year bond if its yield decreases to 5%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

f. What will be the price of the 30-year bond if its yield decreases to 5%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

g. Comparing your answers to parts (a), (b), and (c), are long-term bonds more or less affected than short-term bonds by a rise in interest rates?

• More affected
• Less affected

h. Comparing your answers to parts (d), (e), and (f), are long-term bonds more or less affected than short-term bonds by a decline in interest rates?

 

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Question

Olympic Sports has two issues of debt outstanding. One is an 8% coupon bond with a face value of $36 million, a

maturity of 15 years, and a yield to maturity of 9%. The coupons are paid annually. The other bond issue has a maturity of 20 years, with coupons also paid annually, and a coupon rate of 9%. The face value of the issue is $41 million, and the issue sells for 95% of par value. The firm’s tax rate is 40%.

a. What is the before-tax cost of debt for Olympic? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Before-tax cost of debt = ______ %

b. What is Olympic’s after-tax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

After-tax cost of debt = ______ %

 

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