Question

Given the information in the table, what is the dividend yield from t=0 to t=1?

Today’s Dividend	$3.17
Discount Rate	7.25%
Growth rate in dividends 0 to 1	6.14%
Growth rate in dividends 1 to 2	7.19%
Growth rate in dividends 2 to 3	8.44%
Growth rate in dividends 3 onward	4.05%

Bond A has the following features:

         Face value = $1,000,       

Coupon Rate = 4%,       

Maturity = 10 years, Yearly coupons

         The market interest rate is 4.74%

What is today’s price of bond A?

Answer 1

Answer : Calculation of Dividend Yield :

Dividend Yield = Dividend in year 1 / Current share Price

Current Share Price = Expected Dividend in Year 1 / (Discount rate - Growth rate)

= [3.17 * (1 + 0.0614)] / [0.0725 - 0.0614]

= 3.364638 / 0.0111

= 303.12054054

Dividend Yield = 3.364638 / 303.12054054

= 0.0111 or 1.11%

Answer : Calculation Price of Bond Today

Price = [Coupon * [email protected]% for 10 years] + [Face Value * [email protected]% for 10th year]

= [40 * 7.82016847163] + [1000 * 0.62932401438]

= 312.806738865 + 629.32401438

= 942.13