Pricing a Bond:

Since you have mastered pricing a bond at its initial offering, I would like you to consider the following three scenarios for Zenith Corporation.

1.Zenith Corporation has a 5% $1,000,000 bond issue with a maturity of 12 years. Due to a sudden surge in inflation due to our national debt, the market rate of interest is currently 7%. Interest is paid semi-annually. Show work!

a.Will the bond be sold at a “premium”, “par”, or “discount”?

The bond will be sold at a discount

b.What will be the price and the proceeds?

2.Four years after the original issue (#1 above), with 8 years remaining on the original bond, all banks are taken over the federal government and the current market rate of interest for all “new” bonds will be 3% (market rate of interest) and the current owner decides to sell the bond and move to Australia which has a stronger form of capitalism.

a.Will the bond be sold at a “premium”, “par”, or “discount”?

b.What will be the price and the proceeds?

3.Eight years after the original issue (#1 above) with 4 years remaining, President Sanders realizes the nationalization of banks by the federal government was not such a good idea, now that China will not lend any more money to the government. Since the country is so much in debt, and everything is free, the market rate of interest is now 12%. Ms. Zhou offers to purchase this bond.

a.Will Ms. Zhou pay a premium or discount to the original offering and a premium of discount to the secondary offering price?

b.What will be the price and the proceeds?

Present Value:

For each of the following, please provide the following:

1. Determine whether you use the Present Value or Future Value Tables
2. Do you use the “Single Payment Annuity” or the “Ordinary Annuity”
3. c.Show your calculation for either the present value or future value calculation (Show your work)

1. Assume that $40,000 is invested today. Compute the amount that would accumulate at the end of twelve years when the market rate of interest is 6% compounded annually?
2. A contract calls for a lump sum payment of $120,000. What is the present value of the contract assuming the payment is due in eight years and the current market rate of interest is 6% compounded annually.
3. $3,000 is deposited in an account at the end of each of nine years. What is the future value of those deposits assuming market rate of interest of 12% compounded annually?
4. A contract calls for annual payments of $5,000. What is the present value of the contract assuming the number of payments is twelve, and the current interest rate is 5% compounded annually?
5. What is the present value of 30 payments of $30,000 at market rate of 4% interest per period?
6. What is the present value of $600,000 at 4% per period due at the end of 30 periods