Computing effective yield to maturity for a bond

Reference no: EM13826253

Problem:

Research in Motion (RIM), once known as the global leader in wireless innovation, has lost its darling status after the introduction of the Apple iPhone. In 2011, RIM's stock price declined by approximately 75%. Now management believes they might have to raise capital this year (2012) by issuing debt. You work for an investment bank in Toronto that has been hired by RIM to advise them on the debt issue. Assume the global markets are continuing to experience stress and credit spreads are continuing to widen. Based on your research and market conditions, you feel RIM will have raise $10 million by issuing a four-year bond that has a current yield of 17.61% and a 15.0% coupon rate (coupons will be paid semi-annually).

a) If RIM decides to issue this bond, what will be the effective yield to maturity?

b) Assume an investor bought the bond (in part a) and sold it after two years. If market interest rates remained constant over this period, what was the holding period return on this investment? (Assume the coupons were not re-invested).

c) In order to be able to pay back the total face value ($10 million) in four years, RIM's management has decided to use a sinking fund in which it will make semi-annual payments. The sinking fund pays an interest of 9.0% compounded semi-annually. How much does the company have to contribute to the sinking fund every six months to ensure it has enough funds to pay back the entire bond issue at maturity? (Assume payments will be made at the end of each six month period).

Additional Information:1

This question is basically belongs to the Finance as well as it describes about computing effective yield to maturity for a bond.

Reference no: EM13826253

Questions Cloud

Design a multiphase flow meter component : To research Literature review on the current Multiphase flow meters sensors in the oil and gas industry - design a multiphase flow meter component using CATIA V8, subjecting it to the loading modes in the marine environments.

Probability distribution to the price-rate of return : Seattle Best Company common stock is currently selling for $40 per share. Security analysts at Goldman Sachs have assigned the following probability distribution to the price of (and rate of return on) Seattle Best stock one year from now: Assuming t..

Effective communication for marketing managers : Effective Communication For Marketing Managers In International Markets

Critical review of literature on ethnicity in organizations : This problem relates to HR Management and it's a literature review on ethnicity and race in organizations. The significance of the terms ethnicity and race have been presented in the review

Computing effective yield to maturity for a bond : Research in Motion (RIM), once known as the global leader in wireless innovation, has lost its darling status after the introduction of the Apple iPhone.

Asset replacement project of replacing control device : Cranberry Manufacturing Company is considering an asset replacement project of replacing a control device. This old control device has been fully depreciated but can be sold for $4,000. The new control device, which is more automated, will cost $22,0..

Computing monthly payment for a mortgage loan : You want to purchase a house that costs $325,000. You have a down payment of $65,000 and will take out a mortgage to make up the difference. The AMC Mortgage Corporation offers a quoted interest rate of 3.99 percent annually and you decide on a 30..

Obtaining the socially optimal level of output : In the context of externalities, which method helps in obtaining the socially optimal level of output?

Computing average monthly payment for a car : You are the owner of a used car business near the York campus. Your company borrows money from a bank on a line of credit with a monthly interest rate of 0.50%.

User Account

All Pages