Question

1.A Corporate bond has an 8.50 percent coupon and pays interest annually. The face value is $1,000 and the current market price is $940. The bond matures in 21 years. What is the yield to maturity?

How much are you willing to pay for one share of stock if the company just paid an $.80 annual dividend, the dividends increase by 5.5 percent annually and you require a 9 percent rate of return?

Answer 1

Current Price = 940

Coupon 8.5%

Maturity = 21 years

Let's assume the YTM be 9%

Value of Bond =

=

= 953.538781331

Now,

Let's assume the YTM be 10%

Value of Bond =

=

= 870.269585635

YTM =

= 9% + ((953.538781331 - 940) / (953.538781331 - 940) + (940 - 870.269585635)) * (10-9)

= 9% + (13.538781331 / 83.269195696) * 1

= 9% + 0.1625

= 9.16%

Answer 2)

Value of Stock =

=

= 0.844 / 0.035

= 24.11