Question

Hope bonds have a coupon rate of 7% and mature in 7 years. Assuming semi-annual coupons with face value of $100, what is the value of this bond? Similar bonds yield 6%.

	a.	The value of this bond is $39.54.
	b.	The value of this bond is $106.58.
	c.	The value of this bond is $105.65.
	d.	The value of this bond is $94.54.

Dewyco has preference stock trading at $50 per share. The next preference dividend of $4 is due in one year. What is Dewyco’s cost of capital for preference share?

	a.	The cost for Dewyco’s preference share is 12.5% per annum.
	b.	The cost for Dewyco’s preference share is 9% per annum.
	c.	The cost for Dewyco’s preference share is 8% per annum.
	d.	The cost for Dewyco’s preference share is 20% per annum.

What is the effective annual interest rate corresponding to a nominal interest rate of 7.5% per annum, compounding daily (assume 365 days in a year)?

	a.	The effective annual interest rate is 8.10%.
	b.	The effective annual interest rate is 7.79%.
	c.	The effective annual interest rate is 7.5%.
	d.	The effective annual interest rate is 7.46%

Answer 1

Answer to Question 1.

Face Value = $100

Annual Coupon Rate = 7.00%
Semiannual Coupon Rate = 3.50%
Semiannual Coupon = 3.50% * $100
Semiannual Coupon = $3.50

Annual YTM = 6.00%
Semiannual YTM = 3.00%

Time to Maturity = 7 years
Semiannual Period = 14

Current Price = $3.50 * PVIFA(3.00%, 14) + $100 * PVIF(3.00%, 14)
Current Price = $3.50 * (1 - (1/1.03)^14) / 0.03 + $100 / 1.03^14
Current Price = $105.65

The value of this bond is $105.65

Answer to Question 2.

Cost of Preference share = Annual Dividend / Current Price per share * 100
Cost of Preference share = $4/ $50 * 100
Cost of Preference share = 8%

Therefore, Cost for Dewyco’s Preference share is 8% per annum.

Answer to Question 3.

Effective Annual Rate = (1 + Nominal Interest Rate / Compounding Period)^Compounding Periods - 1
Effective Annual Rate = (1 + 0.075 / 365)^365 - 1
Effective Annual Rate = 1.00020548^365 - 1
Effective Annual Rate = 1.0779 - 1
Effective Annual Rate = 0.0779 or 7.79%