Financial Analysis of Bond Investments, Lecture notes of Management Accounting

Download Financial Analysis of Bond Investments and more Lecture notes Management Accounting in PDF only on Docsity! FIN 300 You purchase a City of Phoenix bond that is paying 5.45%, if you are in the 32% tax bracket, what is your tax equivalent yield? Billy Goat purchased a convertible bond for $1150 with a par value of $1000.  The bond's conversion price is $20 a share and shares of common stock are currently selling for $21 a share.  What is the bonds conversion premium? Builtrite bonds have the following: 4 7/8% coupon, 12 years until maturity, $1000 par and are currently selling at $1036.  If you purchase this bond, what would be your AYTM? Builtrite bonds have the following: 7 ½% coupon, 20 years until maturity, $1000 par and are currently selling at $1140.  If you would be happy to make an 6% return, what would you be willing to pay for the bond? Builtrite sold 16-year, $1000 par value, zero coupon bonds for $339, what was their yield? What are the answers? Tax Equivalent Yield Calculation The tax equivalent yield is calculated using the formula: Tax Equivalent Yield = Tax Free Yield / (1 - Tax Rate) Substituting the given values: Tax Equivalent Yield = 5.45 / (1 - 0.32) = 8.0147% Bond Conversion Premium Calculation The conversion ratio is calculated by dividing the par value by the conversion price: Conversion Ratio = Par Value / Conversion Price Substituting the given values: Conversion Ratio = 1000 / 20 = 50 shares The conversion value is calculated by multiplying the conversion ratio by the current stock price: Conversion Value = Conversion Ratio * Current Stock Price Substituting the given values: Conversion Value = 50 * 21 = $1050 The conversion premium is calculated by subtracting the conversion value from the bond price: Conversion Premium = Bond Price - Conversion Value Substituting the given values: Conversion Premium = 1150 - 1050 = $100 AYTM Calculation The AYTM (Approximate Yield to Maturity) can be calculated using the formula: