In: Accounting
Digi Berhad bond has a 10 percent coupon rate and RM1000 face
value. Interest is paid semi-annually, and the bond has 20 years to
maturity and 12% yield to maturity.
1. What is the bond value if its frequency of compounding is
semi-annually?
2. What is the effective annual yield on the semi-annual coupon
bond?
3. Explain the difference between coupon rate and the yield to
maturity.
4. Assume that a Celcom Berhad experienced a supper-normal growth
rate of 30% in the first 3 years and then return to its long-run
constant growth rate of 6%. The current dividend is RM2 and the
required rate of return is 13%. What is the value of the stock
today?
5.Identify two assumptions of the Gordon Growth Model.
Given info | Annually | Semi annually | ||||
Coupon rate | 10% | 5% | ||||
Face value of bond | RM 100 | RM 100 | ||||
Interest | 10% | 5% | ||||
Number of periods | 20 years | 40 (20*2) | ||||
YTM | 12% | 6% | ||||
Requirement | ||||||
(a) | Value of bond | |||||
Bond value= Coupon amount * PVF(6%, 40 periods) + Maturity value*PVF (6%, 40 periods) | ||||||
Particulars | Period | Cash flow | Present value factor @6% | Present value | ||
Coupon | 40 periods | 5 | 15.046 | 75.23 | ||
maturity value | 40th period | 100 | 0.097 | 9.7 | ||
Value of bond | 84.93 | |||||
(b) | Effective annual yield on semi annual coupon bond | |||||
Effective yield is calculated by dividing the coupon payments by the current market value of the bond. | ||||||
i= [1+(r/n)]^n-1 | Where i= effective yield | |||||
i= [1+(0.10/2)]^2-1 | r= Coupon rate | |||||
n= number of payments per year | ||||||
Therefore, effective rate = 10.25% | ||||||
(c) | Difference between Coupon rate and YTM | |||||
Coupon rate is the rate of interest paid on the bond's face value | ||||||
The yield-to-maturity (YTM) is the rate of return earned on a bond that is held until maturity. | ||||||
(d) | Growth rate in first 3 years = 30% | |||||
Constant Growth rate after 3rd year = 6% | ||||||
current dividend = RM 2 | ||||||
Required rate of return =13%. | ||||||
Value of stock = | ||||||
Years | Dividend | Dividend amount | Calculation | Amount (RM) | Present value @ 13% | |
1 | D1 | RM 2 | 2 (1+0.3) | 2.6 | 2.30 | |
2 | D2 | RM 2 | 2 (1+0.3)^2 | 3.38 | 2.65 | |
3 | D3 | RM 2 | 2 (1+0.3)^3 | 4.39 | 3.04 | |
4 | D4… | RM 2… |
*4.39(1+0.06) [(D(1+g)] |
4.65 | ||
4 | Share value |
*4.65/(0.13-0.06) (D(1+g)/(IRR-g) |
66.43 | 46.04 | ||
Value of stock | 54.03 | |||||
* Value of stock at year 4 = Dividend (1+constant growth rate) / (IRR-Growth rate) |