Summer 2022
BUQU 1130
Assignment # 4
Due: Friday, August 5th, 2022, at 5pm.
Digital submission through Moodle. Only one group member needs to submit.
Late submissions will be penalized.
Assignments can be completed either individually or in groups. If you choose to work in groups,
there can only be a maximum 4 students per group. You are free to work in different groups
throughout the semester.
Please show your work to receive full marks.
Question 1: Rando Ltd issued 15-year bonds with total par value $100,000. The bonds were issued
with coupon rate 6.50%, paid semiannually. Six years after issue, Rando would like to buy back
these bonds from the market. Cu
ently, the market yield on the bonds is 5.75%. Suppose the most
ecent coupon was just paid. How much will Rando need to pay to buy back all outstanding bonds?
Question 2: A 20-year $10,000 face value bond is issued with a 6% semi-annual coupon. It is
exactly 11 years after the bond was issued. Its cu
ent price is $8, XXXXXXXXXXWhat is the yield to
maturity on the bond?
Question 3: A manufacturer is expecting the need to expand its production factory in five years.
It estimates the expansion costs will be $10 million. The manufacturer would like to begin saving
for this expenditure starting today. The company wants to make equal-dollar deposits semiannually
into a sinking fund to save up for this expansion project. The first deposit begins today and the last
deposit occurs at the start of the last period before the expansion occurs. How much will the
company need to deposit each period if the sinking fund pays 8.35% p.a., compounded monthly?
Question 4: You are the manager of a company and need to decide whether to invest in a capital
project. The project requires $2 mill, $2.5 mill, and $3 mill to be invested at the beginning of the
next three years, respectively. The project will be up and running after three years of development
and will earn end-of-year net positive cash flows of $1.2 mill a year for ten years. The project
egins returning its first positive cash flow at the end of its first year of operations. If your required
ate of return is 15%, should you invest in this project?
Question 5: An investment project requires an initial investment today of $1 million. It pays
annual positive cash flows of $200,000 at the end of the next 8 years.
(a) If the company requires a payback period of 4.5 years, should it invest in this project?
(b) If the required rate of return is 12%, should it invest in the project according to NPV?
(c) Using the IRR criterion, should the company invest in the project?
Question 6: You only have enough budget to invest in one project. If your required rate of return
is 12%, which project should you invest in? The cashflows for Projects A and B are below:
Project A
Year Cash Flow
0 -$150,000
1 $200,000
2 $125,000
3 $75,000
Project B
Year Cash Flow
0 -$225,000
1 $100,000
2 $150,000
3 $150,000
4 $175,000
5 $215,000