Question

In: Accounting

Digi Berhad bond has a 10 percent coupon rate and RM1000 face value. Interest is paid...

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.

Solutions

Expert Solution

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)

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