Question

16)

A) A company is planning to issue an annual-pay $500 face value bond that matures in 10 years with a coupon rate of 7.5%. If similar bonds are currently priced to yield 9.25%, what is the price of the bond?

B)

After a recent IPO, SOME Co. has a unique dividend policy. Next year they anticipate paying out a $2 dividend. In year 2, they will increase the dividend to $2.50. In year 3, the dividend will increase to $3.50. After year 3, the dividend will grow at a constant rate of 4%. What is the current stock price? Assume that the required rate of return by shareholders is 10%.

C)Suppose a company just paid a dividend of $1.00 and plans on increasing the dividend each year at a constant rate of 5%. If the current rate required by share holders equals 12%, what is the current stock price?

Answer #1

a)

Coupon = 500 * 0.075 = 37.5

Price = Coupon * [1 - 1 / (1 + r)^{n}] / r + FV / (1 +
r)^{n}

Price = 37.5 * [1 - 1 / (1 + 0.0925)^{10}] / 0.0925 +
500 / (1 + 0.0925)^{10}

Price = 37.5 * 6.34764 + 206.42179

**Price = $444.46**

b)

Year 4 dividend = 3.5 * 1.04 = 3.64

Value at year 3 = D4 / required rate - growth rate

Value at year 3 = 3.64 / 0.1 - 0.04

Value at year 3 = 3.64 / 0.06

Value at year 3 = 60.6667

Current stock price = 2 / (1 + 0.1)^{1} + 2.5 / (1 +
0.1)^{2} + 3.5 / (1 + 0.1)^{3} + 60.6667 / (1 +
0.1)^{3}

**Current stock price = $52.09**

c)

Current stock price = D1 / required rate - growth rate

Current stock price = (1 * 1.05) / 0.12 - 0.05

Current stock price = 1.05 / 0.07

**Current stock price = $15.00**

2. A 7% semiannual coupon bond matures in 8
years. The bond has a face value of $1,000 and is currently trading
at $1,104. Calculate the bond’s YTM.
3. Four years earlier, Janice purchased a
$1,000 face value corporate bond with a 6% annual coupon, and
maturing in 10 years. At the time of the purchase, it had an
expected yield to maturity of 8.76%. If Janice sold the bond today
for $1,088.39, what rate of return would she have...

PGP Co. expects to issue a $1,000 face-value bond that matures
in 8 years. The annual coupon rate is 9%, and interest payments are
expected to be paid semiannually. Similar bonds are currently
priced at 101.4% of face value. Given this information, what is the
required return by bondholders?
4.38%
8.75%
4.56%
8.49%
9.12%

A bond has a coupon rate of 7.5% and matures in 10 years. The
current required return for the bond is 6.8%. Calculate the current
price of the bond and the current yield.

A bond with a $1,000 face value and a 15 percent annual coupon
rate matures in 30 years.
a. Determine the value of the bond to a friend of yours with a
required rate of return of 11%.
b. A zero coupon bond with similar risk is selling for $550. The
bond has a face value of $1,000 and matures in 30 years. Your
friend asks you which bond she should invest in, the zero coupon
bond or the bond...

A bond with a $1,000 face value has a 5% annual coupon rate. The
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the same. Answer in dollars and round to the nearest cent. [Hint:
1) If the price drops, the change is a negative number. 2) Compute...

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the price change while you hold it? Assume the bond's YTM remains
the same. Answer in dollars and round to the nearest cent. [Hint:
1) If the price drops, the change is a negative number. 2) Compute...

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16. A 10-year bond, $100 face value bond with a 8% coupon rate
and semi-annual coupons has a yield maturity of 5%. The bond should
be trading at a price of $.___ Round to the nearest cent.
17. XYZ company has just issued a 30-year bond with a coupon
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the yield to maturity is 11%, what is the price of the bond. Round
to the nearest cent....

A 10-year bond is issued with a face value ofK1,000, paying
interest of K60 a year. If
market yields increase shortly after
the T-bond is issued, what happens to the bond’s
a. Coupon rate?
b. Price?
c. Yield to maturity?
A 10-year bond is issued with a face value ofK1,000, paying
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c. Yield to maturity?

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