Bond Issue A Bond Issue B
Face Value 1000 1000
Current Price 97 104
Coupon rate 5% 7%
Payable Annually Semiannually
Years to maturity 14 6
Number of bonds outstanding 4000 2500
What is the YTM on bond A? _________________
What is the YTM on bond B? _________________
What is the market value weight (percentage) for bond A? ____________
What is the market value weight (percentage) for bond B? ____________
What is the weighted average cost of debt? ________________
Can you explain where how to calculate the PV and the PMT? For
example -970 -1040 (PV) and PMT of 50 and 35? I understand the
calculator.
a). To find the YTM of Bond A, we need to put the following values in the financial calculator:
| INPUT | 14 | -(97%*1,000) = -970 | 5%*1,000=50 | 1,000 | |
| TVM | N | I/Y | PV | PMT | FV |
| OUTPUT | 5.31 |
So, YTM of Bond A = 5.31%;
b). To find the YTM of Bond B, we need to put the following values in the financial calculator:
| INPUT | 6*2=12 | -(104%*1,000) = -1,040 | (7%/2)*1,000=35 | 1,000 | |
| TVM | N | I/Y | PV | PMT | FV |
| OUTPUT | 3.10 |
So, YTM of Bond B = 3.10% x 2 = 6.19%;
c). Market Value of Bond A = $970 x 4,000 = $3,880,000
Market Value of Bond B = $1,040 x 2,500 = $2,600,000
Total Market Value = $3,880,000 + $2,600,000 = $6,480,000
wA = Market Value of Bond A / Total Market Value = $3,880,000 / 6,480,000 = 59.88%
d).wB = Market Value of Bond B / Total Market Value = $2,600,000 / 6,480,000 = 40.12%
e). WACC = [wA x kD(A)] + [wB x kD(B)]
= [59.88% x 5.31%] + [40.12% x 6.19%] = 3.18% + 2.48% = 5.66%
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