Question

4. Heather Smith is considering a bond investment in Locklear Airlines. The $1,000 par value bonds have a quoted annual interest rate of 11 percent and the interest is paid semiannually. The yield to maturity on the bonds is 14 percent annual interest. There are 10 years to maturity.    
  
Compute the price of the bonds based on semiannual analysis. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
  

5.   

North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed dividend of $11 per share. With the passage of time, yields have soared from the original 12 percent to 8 percent (yield is the same as required rate of return).
  
a. What was the original issue price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
  

  
b. What is the current value of this preferred stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
  

  
c. If the yield on the Standard & Poor’s Preferred Stock Index declines, how will the price of the preferred stock be affected?
  

	The price of preferred stock will increase.
	The price of preferred stock will decrease.

Answer 1

Question 4

Bond Valuation: The value of bond is the present value of the expected cashflows from the bond,discounted at Yield to Maturity(YTM).

Prima facie, the bond will trade at discount as YTM>coupon rate

Year	Cash flow	PVAF/PVF@7%	Present Value (Cashflow*PVAF/PVF)
1-20	55	10.5940*	582.67
20	1000	0.2584**	258.42

Current Market Price of Bonds = Cashflow*PVAF/PVF

= 582.67+258.42

= 841.09

Note : Since the bond makes semiannual interest payments, total no. of period is 20 (10*2), cashflow per period is 55(1000*11%/2) and cashflows are discounted at 7% (14/2)

*PVAF = (1-(1+r)^-n)/r

**PVF = 1 / (1+r)^n

Question 5

a. What was the original issue price?

Price of Preferred Stock = Annual constant Dividend/Yield

= 11/.12

= 91.67

b. What is the current value of this preferred stock?

Price of Preferred Stock = Annual constant Dividend/Yield

= 11/.08

= 137.50

c. If the yield on the Standard & Poor’s Preferred Stock Index declines, how will the price of the preferred stock be affected?

The price of preferred stock will increase.