Question

Bradley, Inc. has a 9 percent coupon bond that matures in 5 years. The bond pays interest annually. What is the market price of a $1,000 face value bond if the yield to maturity is 7.56 percent?

• $1,058.17
• $1,126.64
• $363.55
• $1,146.13
• $1,000.00

AAA, Inc. pays a $2.25 annual dividend per share to preferred stock shareholders. If the required rate of return is 5.6%, what is the value of preferred stock?

• $42.43
• $36.81
• $38.33
• $40.18

Answer 1

Given about Bardley, Inc.'s bond,

Face value = $1000

coupon rate = 9%

years to maturity = 5

yield to maturity = 7.56%

annual coupon payment = 9% of 1000 = $90

price of the bond can be calculated on financial calculator using following values:

FV = 1000

PMT = 90

N = 5

I/Y = 7.56

compute for PV, we get PV = 1058.17

So market price of the bond is $1058.17

Option A is correct.

2). Given about AAA, Inc,

annual dividend D = $2.25

rate of return on preferred stock Kp = 5.6%

So, value of preferred stock using perpetual model is

Value = D/Kp = 2.25/0.056 = $40.18

Option D is correct.