Question

a) What is the main difference between a loan and a bond?
b) Sishumba Enterprises issued new 10 year bonds on January 1, 2007. The bonds were issued at K1, 000 nominal value and sold at K 1, 782, paying a 12% annual coupon.
i. Calculate the YTM of the bonds on January 1, 2012.
ii. Calculate the bond’s price and current yield on January 1, 2015, 8 years later, assuming interest fell to 7%.
iii. Suppose these bonds were callable, attracting a 10% premium. Calculate the YTC if the bond was called on January 1, 2013.
e) A company has just paid a K2.00 dividend per share and dividends are expected to grow at a rate of 6% indefinitely. If the required return is 13%, what is the value of the stock today?
f) Stock CBC last paid a dividend of K1.03. Dividends are expected to grow at 5% forever, with an expected return on the market is 11%, a 0.8 beta and a risk-free rate of return is 5%. Find the value of a stock.

Answer 1

Answer to Part a):

The main differences between a Loan and a Bond are:

1. Loans are amount borrowed from a particular bank or Financial Institution, whereas Bonds are amount borrowed from public at large.
2. In Loan, amount borrowed is repaid in the form of Instalment. The Instalment comprises of interest on outstanding loan plus principal amount. Whereas, Bonds are redeemed on maturity date with regular payment of interest at regular interval period of time over the life of bonds.
3. In Loan, monthly payment is paid towards interest and principal amount, whereas in Bonds, annual/quarterly, semi-annually payment is made for Interest.