Question
In: Finance
1..... Bombay Company has issued $1,000 par value bonds that are currently selling for $933.89. The...
1..... Bombay Company has issued $1,000 par value bonds that are currently selling for $933.89. The bonds have a coupon rate of 9% and are paying interest semiannually. What is the yield-to-maturity on these bonds if they have 8 years until they reach maturity? Select one: A. 9.49% B. 8.03% C. 9.44% D. 10.23%
2....A 20-year $1,000 par value bond pays a coupon rate of interest of 12%. If similar bonds are currently yielding 9%, what is the market value of the bond? Assume semi-annual coupon payments. Select one: A. $1,236.45 B. $1,273.86 C. $1,323.80 D. $1,276.02
3... At the end of the coming year, State Street Corporation will pay a dividend of $4.75 per share on its common stock. The required rate of return is 11%. The firm expects dividends to grow at a constant rate of 6%. What is the value of a share of State Street's stock? Select one: A. $36 B. $67 C. $80 D. $95
Solutions
Expert Solution
Solution 1:
| Frequency in a year | 2 | ||||||||
| YTM | 0.00% | ||||||||
| Coupon rate | 9.00% | ||||||||
| Face value | $ 1,000 | ||||||||
| Coupon payment | $ 45.00 | =1000*9%/2 | |||||||
| Years to maturity | 5 | ||||||||
| No. of periods | 10 | ||||||||
| 5.00% | 6.00% | ||||||||
| Year | Cash Flow | PV factor = 1/ (1+r)^t | PV | PV factor = 1/ (1+r)^t | PV | ||||
| 0 | $ (933.89) | 1.000 | $ (933.89) | 1.000 | $ (933.89) | ||||
| 1 | $ 45.00 | 0.952 | $ 42.86 | 0.943 | $ 42.45 | ||||
| 2 | $ 45.00 | 0.907 | $ 40.82 | 0.890 | $ 40.05 | ||||
| 3 | $ 45.00 | 0.864 | $ 38.87 | 0.840 | $ 37.78 | ||||
| 4 | $ 45.00 | 0.823 | $ 37.02 | 0.792 | $ 35.64 | ||||
| 5 | $ 45.00 | 0.784 | $ 35.26 | 0.747 | $ 33.63 | ||||
| 6 | $ 45.00 | 0.746 | $ 33.58 | 0.705 | $ 31.72 | ||||
| 7 | $ 45.00 | 0.711 | $ 31.98 | 0.665 | $ 29.93 | ||||
| 8 | $ 45.00 | 0.677 | $ 30.46 | 0.627 | $ 28.23 | ||||
| 9 | $ 45.00 | 0.645 | $ 29.01 | 0.592 | $ 26.64 | ||||
| 10 | $ 45.00 | 0.614 | $ 27.63 | 0.558 | $ 25.13 | ||||
| 11 | $ 45.00 | 0.585 | $ 26.31 | 0.527 | $ 23.71 | ||||
| 12 | $ 45.00 | 0.557 | $ 25.06 | 0.497 | $ 22.36 | ||||
| 13 | $ 45.00 | 0.530 | $ 23.86 | 0.469 | $ 21.10 | ||||
| 14 | $ 45.00 | 0.505 | $ 22.73 | 0.442 | $ 19.90 | ||||
| 15 | $ 45.00 | 0.481 | $ 21.65 | 0.417 | $ 18.78 | ||||
| 16 | $ 45.00 | 0.458 | $ 20.62 | 0.394 | $ 17.71 | ||||
| 16 | $ 1,000.00 | 0.458 | $ 458.11 | 0.394 | $ 393.65 | ||||
| Total | $ 11.92 | Total | $ (85.48) | ||||||
| NPV @ 0.05 | 11.92 | ||||||||
| NPV @ 0.06 | (85.48) | ||||||||
| Difference in both | 97.40 | ||||||||
| YTM | =Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV) | ||||||||
| '=5%+ (6%-5%)*(11.921/(11.921+85.478) | |||||||||
| YTM | 5.12% | ||||||||
| Annual YTM- | 5.12*2% | ||||||||
| Annual YTM- | 10.24% |
Solution-2:
| PV of annual interest payment | ||
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