Question

1. Home and Hardware, Inc. recently issued a bond with a $20,000 par or face value. The bond has a six-year life and a coupon interest rate of 4%. Assume that the required return on the market for this bond is 10%. Given this information, calculate the market value of this bond today. The bond pays interest annually.

2. Family Foods, Inc. has a preferred stock issue outstanding that has a par value per share of $65.00. This preferred stock pays an annual divided that is 8% of its par value. Calculate the annual dividend paid per share on this preferred stock.

Answer 1

1.

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =6

Bond Price =∑ [(4*20000/100)/(1 + 10/100)^k]     +   20000/(1 + 10/100)^6

k=1

Bond Price = 14773.69

2.

Annual dividend = dividend percentage*par value = 0.08*65=5.2