Chapter 6 CFIN5

Solution Manual for CFIN 5th Edition by Besley and Brigham

ISBN 1305661656 9781305661653
Full download link at:

Test bank: https://testbankpack.com/p/test-bank-for-cfin-5th-edition-by-besley-and-brigham-

isbn-1305661656-9781305661653/

Solution manual: https://testbankpack.com/p/solution-manual-for-cfin-5th-edition-by-besley-

and-brigham-isbn-1305661656-9781305661653/ Chapter 6 Solutions

Minimum $1,000
6-1   $40
stock price 25

6-2 a. Each bond can be converted into 40 shares of common stock.

Minimum $1,000
b.   $25 ; As long as the stock is selling for greater than $25 per share, it is
stock price 40
worthwhile to convert (ignoring transactions costs).

6-3 Selling the bond would generate $980. Converting the bond and selling the common stock would
generate $950 = 50 x ($19 per share). Thus, it would be better to sell the bond than to convert it into
stock.

6-4 Calculator solution:

N = interest payments remaining until maturity = 10 x 2 = 20
I/Y = 6.0/2 = 3.0
PMT = Interest payment = (0.045 x 1,000)/2 = $22.50
FV = $1,000
PV = ? = -888.42

Equation solution:
1  1 
 1   (1.03)20 
Value  $1,000  20 
 $22.50  
 (1.03)  0.03
 
 
 $1,000(0.553675)  $22.50(14.877474)

 $553.68  $334.74  $888.42

6-5 Calculator solution:

N = interest payments remaining until maturity = 4 x 2 = 8
I/Y = 7.0/2 = 3.5
PMT = Interest payment = (0.05 x 1,000)/2 = 25
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accessible website, in whole or in part.
Chapter 6 CFIN5

FV = 1,000
PV = ? = -931.26

Equation solution:
1  1 
 1   (1.035)8 
Value  $1,000  8
 $25  
 (1.035)  0.035
 
 
 $1,000(0.759411)  $25(6.873956)

 $759.41  $171.85  $931.26

6-6 Calculator solution:

N = interest payments remaining until maturity = 8 x 2 = 16
I/Y = 4.0/2 = 2.0
PMT = Interest payment = (0.09 x 1,000)/2 = 45
FV = 1,000
PV = ? = -1,339.44

Equation solution:
1  1 
 1   (1.02)16 
Value  $1,000  16 
 $45  
 (1.02)   0.02

 
 $1,000(0.728446)  $45(13.577709)

 $728.45  $611.00  $1,333.45 (rounding)

6-7 Calculator solution:

N = interest payments remaining until maturity = 4 x 2 = 8
I/Y = 5.0/2 = 2.5
PMT = Interest payment = (0.06 x 1,000)/2 = 30
FV = 1,000
PV = ? = -1,035.85

Equation solution:
1  1 
 1   (1.025)8 
Value  $1,000  8
 $30  
 (1.025)  0.025
 
 
 $1,000(0.820747)  $30(7.170137)

 $820.75  $215.10  $1,035.85

6-8 Calculator solution:

N = interest payments remaining until maturity = 6 x 2 = 12
I/Y = 12.0/2 = 6.0
PMT = Interest payment = (0.08 x 1,000)/2 = 40

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Chapter 6 CFIN5

FV = 1,000
PV = ? = -832.32

Equation solution:
1 1 
 1   (1.06)12 
Value  $1,000  12 
 $40  
 (1.06)  0.06
 
 
 $1,000(0.496969)  $40(8.383844)

 $496.97  $335.35  $832.32

6-9 a. Market rate = 5%

Calculator solution for Bond S:

N = interest payment remaining until maturity = 1
I/Y = 5
PMT = Interest payment = 100
FV = 1,000
PV = ? = -1,047.62

Equation solution for Bond S:

1 1 
 1   (1.05)1 
Value  $1,000  1
 $100  
 (1.05)  0.05
 
 
 $1,000(0.952381)  $100(0.952381)

 $952.38  $95.24  $1,047.62

Calculator solution for Bond L:

N = interest payments remaining until maturity = 15
I/Y = 5
PMT = Interest payment = 100
FV = 1,000
PV = ? = -1,518.98

Equation solution for Bond L:

1 1 
 1   (1.05)15 
Value  $1,000  15 
 $100  
 (1.05)   0.05 
 
 $1,000(0.481017)  $100(10.379658)

 $481.02  $1,037.97  $1,518.99 (rounding)

b. Market rate = 7%

Calculator solution for Bond S:

N = interest payment remaining until maturity = 1

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accessible website, in whole or in part.
Chapter 6 CFIN5

I/Y = 7
PMT = Interest payment = 100
FV = 1,000
PV = ? = -1,028.04

Equation solution for Bond S:

1 1 
 1   (1.07)1 
Value  $1,000  1
 $100  
 (1.07)  0.07
 
 
 $1,000(0.934579)  $100(0.934579)

 $934.58  $93.46  $1,028.04

Calculator solution for Bond L:

N = interest payments remaining until maturity = 15
I/Y = 7
PMT = Interest payment = 100
FV = 1,000
PV = ? = -1,273.24

Equation solution for Bond L:

1 1 
 1   (1.07)15 
Value  $1,000  15 
 $100  
 (1.07)  0.07
 
 
 $1,000(0.362446)  $100(9.107914)

 $362.45  $910.79  $1,273.24

6-10 Equation solution (set up):

1 1 
 (1  YTM)5   1 
$621  $0    $1,000  
 (1  YTM) 
YTM 5
 
 

Calculator solution for YTM:

N=5
PV = -621
PMT = 0 (this is a zero coupon bond)
FV = 1,000
I/Y = ? = 10.0%

6-11 a. Interest payments = [0.09($1,000)]/2 = $45

Number of interest payments remaining until maturity = 4 x 2 = 8

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accessible website, in whole or in part.
Chapter 6 CFIN5

Equation solution (set up):

1 1   
  2  

8
1 YTM 
  1 
$851  $45    $1,000  



YTM
2  
  
 1  YTM  
 
8

2  
 

Calculator solution for YTM:

N=8
PV = -851
PMT = 45
FV = 1,000
I/Y = ? = 7.0, which is the six-month yield
YTM = 7.0 x 2 = 14.0%

b. Equation solution (set up):

1  1   
  2  
 1 YTM 
8
  1 
$1,105  $45    $1,000  


YTM 2  
 
 1  YTM  
 
8

2  
 

Calculator solution for YTM:

N=4x2=8
PV = -1,105
PMT = (0.09 x 1,000)/2 = 45
FV = 1,000
I/Y = ? = 3.0, which is the six-month yield
YTM = 3.0 x 2 = 6.0%

6-12 Interest payments = [0.055($1,000)]/2 = $27.50

Number of interest payments remaining until maturity = 5 x 2 = 10

Equation solution (set up):

1  1   
  2  

10
1 YTM 
  1 
$1,022  $27.50    $1,000  



YTM
2  
  
 1  YTM  
 
10

2  
 

Calculator solution for YTM:

N = 10
PV = -1,022
PMT = 27.50
FV = 1,000
I/Y = ? = 2.5, which is the six-month yield
YTM = 2.5 x 2 = 5.0%
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Chapter 6 CFIN5

6-13 a. Interest payments = [0.04($1,000)]/2 = $20

Number of interest payments remaining until maturity = 16 x 2 = 32

Equation solution (set up):

1 1   
  2  
 1 YTM 
32
  1 
$714  $20    $1,000  



YTM
2  
 
 1  YTM  
 
32

2   
 

Calculator solution for YTM:

N = 32
PV = -714
PMT = 20
FV = 1,000
I/Y = ? = 3.5, which is the six-month yield
YTM = 3.5 x 2 = 7.0%

b. Number of interest payments remaining until call date = 3 x 2 = 6

Call price = $1,040

Equation solution (set up):

1  1   
  2  
 1 YTC 
6
  1 
$714  $20    $1,016  



YTC
2  
 
 1  YTC  
 
6

2  
 

Calculator solution for YTC:

N=6
PV = -714
PMT = 20
FV = 1,016
I/Y = ? = 8.50, which is the six-month yield
YTM = 8.50 x 2 = 17.0%

6-14 a. Interest payments = [0.085($1,000)]/2 = $42.50

Number of interest payments remaining until maturity = 17 x 2 = 34

Equation solution (set up):

1 1   
  2  

34
1 YTM 
  1 
$1,046  $42.50    $1,000  



YTM
2  
 
 1  YTM  
 
34

2  
 

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Chapter 6 CFIN5

Calculator solution for YTM:

N = 34
PV = -1,046
PMT = 42.50
FV = 1,000
I/Y = ? = 4.0, which is the six-month yield
YTM = 4.0 x 2 = 8.0%

b. Number of interest payment remaining until call date = 4 x 2 = 8

Call price = $1,085

Equation solution (set up):

1  1   
  2  
 1 YTC 
8
  1 
$1,046  $42.50    $1,089  



YTC
2  
  
 1  YTC  
 
8

2  
 

Calculator solution for YTC:

N=8
PV = -1,046
PMT = 42.50
FV = 1,089
I/Y = ? = 4, which is the six-month yield
YTM = 4.50 x 2 = 9.0%

6-15 a. Current yield = (0.07 x 1,000)/996 = 0.070 = 7.0%

Capital gains yield = (1,006 – 996)/996 = 0.01 = 1.0%

Total yield = [(0.07 x 1,000) + (1,006 – 996)]/996 = 80/996 = 0.080 = 8.0% = 7.0% + 1.0%

b. Interest payments = 0.07($1,000) = $70

Number of interest payments remaining until maturity = 8

Equation solution (set up):

1 1 
$1,005  $70  (1 YTM)8   $1,000  1 
 YTM   8
   (1  YTM) 

Calculator solution for YTM:

N=8
PV = -1,006
PMT = 70
FV = 1,000
I/Y = ? = 6.9, which is the one-year yield
YTM = 6.9%

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accessible website, in whole or in part.
Chapter 6 CFIN5

6-16 (1) Market value of the bond two (2) years after issue:

Calculator solution:
N = interest payments remaining until maturity = 8 x 2 = 16
I/Y = 6/2 = 3
PMT = Interest payment = (0.10 x 1,000)/2 = 50
FV = 1,000
PV = ? = -1,251.22

Equation solution:
1 1 
 1   (1.03)16 
Value  $1,000  16 
 $50  
 (1.03)   0.03

 
 $1,000(0.623167)  $50(12.561102)

 $623.17  $628.06  $1,251.23 (rounding)

(2) Market value of the bond three (3) years after issue:

Calculator solution:
N = interest payments remaining until maturity = 7 x 2 = 14
I/Y = 6/2 = 3
PMT = Interest payment = (0.10 x 1,000)/2 = 50
FV = 1,000
PV = ? = -1,225.92

Equation solution:
1  1 
 1   (1.03)14 
Value  $1,000  14 
 $50  
 (1.03)  0.03
 
 
 $1,000(0.661118)  $50(11.296073)

 $661.12  $564.80  $1,225.92

a. Current yield = $100/$1,251.23 = 0.080 = 8.0%

b. Capital gains yield = ($1,225.92 - $1,251.23)/$1,251.23 = -0.020 = -2.0%

Total return in Year 3 = 8.0% - 2.0% = 6.0% = [$100 + ($1,225.92 - $1,251.23)]/$1,251.23

6-17 (1) Market value of the bond four (4) years after issue:

Calculator solution:
N = interest payments remaining until maturity = 11 x 2 = 22
I/Y = 10/2 = 5
PMT = Interest payment = (0.07 x 1,000)/2 = 35
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Chapter 6 CFIN5

FV = 1,000
PV = ? = -802.55

Equation solution:
1  1 
 1   (1.05)22 
Value  $1,000  22 
 $35  
 (1.05)   0.05

 
 $1,000(0.341850)  $35(13.163003)

 $341.85  $460.71  $802.56 (rounding)

(2) Market value of the bond five (5) years after issue:

Calculator solution:
N = interest payments remaining until maturity = 10 x 2 = 20
I/Y = 10/2 = 5
PMT = Interest payment = (0.07 x 1,000)/2 = 35
FV = 1,000
PV = ? = -813.07

Equation solution:
1 1 
 1   (1.05)20 
Value  $1,000  20 
 $35  
 (1.05)  0.05
 
 
 $1,000(0.376889)  $35(12.462210)

 $376.89  $436.18  $813.07

a. Current yield = $70/$802.55 = 0.087 = 8.7%

b. Capital gains yield = ($813.07 - $802.55)/$802.55 = 0.013 = 1.3%

Total return in Year 3 = 8.7% + 1.3% = 10.0% = [$70 + ($813.07 - $802.55)]/$802.55

6-18 a. Current yield = (0.04 x 1,000)/1,000 = 0.04 = 4.0%

Capital gains yield = (929 – 1,000)/1,000 = -0.071 = -7.1%

Total yield = 4.0% - 7.1% = -3.1% = ($40 - $71)/$1,000

b. Equation solution (set up):

1  1   
  2  
 1 YTC 
9
  1 
$929  $40    $1,000  



YTC
2  
  
 1  YTC  
 
9

2  
 

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Chapter 6 CFIN5

Calculator solution for YTM:

N=9
PV = -929
PMT = 0.04 x 1,000 = 40
FV = 1,000
I/Y = ? = 5.0, this represents the yield that new bondholders would earn if they buy the bond for
$929 today.

6-19 a. Calculator solution:

N = interest payments remaining until maturity = 7
I/Y = 6.0
PMT = Interest payment = (0.06 x 1,000) = $60
FV = $1,000
PV = ? = -1,000.00

Equation solution:
1 1 
 1   (1.06)7 
Value  $1,000  7
 $60  
 (1.06)  0.06
 
 
 $1,000(0.66506)  $60(5.58238)

 $665.06  $334.94  $1,000.00

b. & c. Because the bond is currently selling at par—that is, its current value is $1,000—its value will
remain at $1,000 for the remainder of its life as long as market interest rates do not change. As
a result, the current yield and capital gains yield each year will be:

Current yield = $60/$1,000 = 0.06 = 6.0%

Capital gains yield = ($1,000 – $1,000)/1,000 = 0.00 = 0%

Total yield = 6.0% + 0.0% = 6.0% = ($60 + $0)/$1,000

6-20 a. Calculator solution:

N = interest payments remaining until maturity = 3
I/Y = 11.0
PMT = Interest payment = (0.0 x 1,000) = $0
FV = $1,000
PV = ? = -731.19

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Chapter 6 CFIN5

Equation solution:
1 1 
 1   (1.11)3 
Value  $1,000  3
 $0  
 (1.11)  0.11
 
 
 $1,000(0.731191)  $0(2.443715)

 $731.19  $0.0  $731.19

b. & c. The current yield and capital gains yield during the next three years will be:

(1) Year 1: Current price = $731.19 (three years remain until maturity)
Input N = 2, I/Y = 11, PMT = 0, and FV = 1,000; compute PV = -811.62, which will be the
value of the bond when two years remain until maturity.

Current yield = $0/$731.19 = 0.0 = 0.0%

Capital gains yield = ($811.62 – $731.19)/$731.19 = 0.11 = 11.0%

Total yield = 0.0% + 11.0% = 11.0% = ($0 + $80.43)/$731.19

(2) Year 2: Current price = $811.62 (two years remain until maturity)

Input N = 1, I/Y = 11, PMT = 0, and FV = 1,000; compute PV = -900.90, which was the
value of the bond when one year remains until maturity.

Current yield = $0/$811.62 = 0.0 = 0.0%

Capital gains yield = ($900.90 – $811.62)/$811.62 = 0.11 = 11.0%

Total yield = 0.0% + 11.0% = 11.0% = ($0 + $89.28)/$811.62

(3) Year 3: Current price = $900.90 (two years remain until maturity)

Input N = 0, I/Y = 11, PMT = 0, and FV = 1,000; compute PV = -1,000, which was the value
of the bond at maturity.

Current yield = $0/$900.90 = 0.0 = 0.0%

Capital gains yield = ($1,000.00 – $900.90)/$900.90 = 0.11 = 11.0%

Total yield = 0.0% + 11.0% = 11.0% = ($0 + $99.10)/$900.90

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.