A corporate bond pays semi-annual coupons at 8% and will mature in 8 years. What is...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
A corporate bond pays semi-annual coupons at 8% and will mature in 8 years. What is the price of the bond if its face value is $1000 and its yield to maturity is 9%? Hint: The price of a bond is the present value of its future cash flows, which include both the periodic coupon payments and the face value at maturity. The price (P) of a bond can be expressed as: P=- C*(1-(1+i)") F Where: + (1+i) C: Periodic coupon payment (semi-annual in this case) i: Yield to Maturity per period (semi-annual in this case) n: Number of interest periods per year t: Number of years to maturity F: Face value of the bond You are given the following: C (semi-annual coupon payment) = 8% of $1000 = $80 i (yield to maturity per period)=9%/2/100 = 0.045 (semi-annual) n (semi-annual periods per year) - 2 t (years to maturity)=8 F (face value) = $1000 Calculate the Bond Value: P=80(1-(1+0.045)-2) 0.045 1000 (1+0.045) Contextualize and explain your results in at least 75 words: 2 A corporate bond with a face value of $1000 will mature in 5 years, and has a semi-annual coupon rate of 7% with a current yield of 8.25%. What is the bond's yield to maturity? Hint: YTM is also the internal rate of return (IRR) of the bond's future cash flows. You are given the following information: Face value (F) = $1000. Time to maturity (t) = 5 years Semi-annual coupon rate (C) = 7% of $1000 = $70 (semi-annual) Current yield (CY) = 8.25% (annual). Since the coupon payments are semi-annual, the semi-annual current yield (i) can be calculated as 0.0825/2 to get the semi-annual rate P = 1) Find the annual coupon payment (AC) AC = (CY/100) * F 2) Find the semi-annual coupon payment (C): c(1-(1+i)) + Where: + F (1+i)" C: Periodic (semi-annual) coupon payment i: semi-annual Yield to Maturity n: Number of interest periods per year t: total number of periods (semi-annual * # years till maturity) F: Face value of the bond Giving us the semi-annual YTM and the annual YTM would be twice that Contextualize and explain your results in at least 75 words: 3 The 30-day T-bills have a current yield of 6.4% with inflation premium at 3.5%, liquidity premium at 1.25%, maturity risk premium at 2.15%, and default risk premium at 2.75%. What is the real risk-free rate of return? Hint: The real risk-free rate of return can be calculated using the Fisher equation as: 1+Nominal Rate=(1+Real Rate)(1+Inflation Rate) Rearranging gives us: Real Rate =[(1+Inflation Rate) / (1+Nominal Rate) ] -1 You are given the following: Nominal Rate = Current yield on T-bills = 6.4% Inflation Rate Inflation premium = 3.5% Using these these values into the equation gives us: = Real Rate [(1+0.064)/ (1+0.035)] - 1 the real risk-free rate of return: Contextualize and explain your results in at least 75 words: 4 ABC Corp. will generate $30 million in free cash flows next year, and expected to grow at a constant rate of 3.5% per year. The firm has no debt or preferred stock and its WACC is 11% with 20 million shares outstanding. What is its stock value per share? Hint: We can use the Gordon Growth Model (Dividend Discount Model) to calculate the stock value per share: Stock Value per Share = [Expected Dividends or Free Cash Flows] / [Required Rate of Return - Growth Rate] Since ABC Corp. has no debt or preferred stock, and the free cash flows are expected to grow at a constant rate, we can use them as if they were dividends. So, the modified formula becomes: Stock Value per Share [Expected Free Cash Flows * (1+ Growth Rate)]/[Required Rate of Return - Growth Rate] You are given the following information: Expected Free Cash Flows next year = $30 million Growth Rate = 3.5% Required Rate of Return (WACC) = 11% Plug in these values in the modified formula to get stock value per share: Stock Value per Share = [30(1+0.035)]/[0.11-0.035] Contextualize and explain your results in at least 75 words: 5 PQR Corp. shares currently sell for $37. It just paid a dividend of $2.25, and expected to grow at a constant rate of 4% per year. What will be the expected stock price next year and the required rate of return? Hint: We can use the Gordon Growth Model (Dividend Discount Model) to calculate the expected stock price next year : P D*(1+g) (r-g) Where: Do current dividend ($2.25) g=constant growth rate of dividends (4%) r = required rate of return Using DDM we can calculate expected stock price next year as: P = [2.25 * (1.04)]/ (r-0.04) We also know that expected stock price next year will increase with the growth in dividends as: P = P *(1+ g) = 37 *(1+0.04) Using the two equations through substitution will give us the required rate of return (r): Contextualize and explain your results in at least 75 words: A corporate bond pays semi-annual coupons at 8% and will mature in 8 years. What is the price of the bond if its face value is $1000 and its yield to maturity is 9%? Hint: The price of a bond is the present value of its future cash flows, which include both the periodic coupon payments and the face value at maturity. The price (P) of a bond can be expressed as: P=- C*(1-(1+i)") F Where: + (1+i) C: Periodic coupon payment (semi-annual in this case) i: Yield to Maturity per period (semi-annual in this case) n: Number of interest periods per year t: Number of years to maturity F: Face value of the bond You are given the following: C (semi-annual coupon payment) = 8% of $1000 = $80 i (yield to maturity per period)=9%/2/100 = 0.045 (semi-annual) n (semi-annual periods per year) - 2 t (years to maturity)=8 F (face value) = $1000 Calculate the Bond Value: P=80(1-(1+0.045)-2) 0.045 1000 (1+0.045) Contextualize and explain your results in at least 75 words: 2 A corporate bond with a face value of $1000 will mature in 5 years, and has a semi-annual coupon rate of 7% with a current yield of 8.25%. What is the bond's yield to maturity? Hint: YTM is also the internal rate of return (IRR) of the bond's future cash flows. You are given the following information: Face value (F) = $1000. Time to maturity (t) = 5 years Semi-annual coupon rate (C) = 7% of $1000 = $70 (semi-annual) Current yield (CY) = 8.25% (annual). Since the coupon payments are semi-annual, the semi-annual current yield (i) can be calculated as 0.0825/2 to get the semi-annual rate P = 1) Find the annual coupon payment (AC) AC = (CY/100) * F 2) Find the semi-annual coupon payment (C): c(1-(1+i)) + Where: + F (1+i)" C: Periodic (semi-annual) coupon payment i: semi-annual Yield to Maturity n: Number of interest periods per year t: total number of periods (semi-annual * # years till maturity) F: Face value of the bond Giving us the semi-annual YTM and the annual YTM would be twice that Contextualize and explain your results in at least 75 words: 3 The 30-day T-bills have a current yield of 6.4% with inflation premium at 3.5%, liquidity premium at 1.25%, maturity risk premium at 2.15%, and default risk premium at 2.75%. What is the real risk-free rate of return? Hint: The real risk-free rate of return can be calculated using the Fisher equation as: 1+Nominal Rate=(1+Real Rate)(1+Inflation Rate) Rearranging gives us: Real Rate =[(1+Inflation Rate) / (1+Nominal Rate) ] -1 You are given the following: Nominal Rate = Current yield on T-bills = 6.4% Inflation Rate Inflation premium = 3.5% Using these these values into the equation gives us: = Real Rate [(1+0.064)/ (1+0.035)] - 1 the real risk-free rate of return: Contextualize and explain your results in at least 75 words: 4 ABC Corp. will generate $30 million in free cash flows next year, and expected to grow at a constant rate of 3.5% per year. The firm has no debt or preferred stock and its WACC is 11% with 20 million shares outstanding. What is its stock value per share? Hint: We can use the Gordon Growth Model (Dividend Discount Model) to calculate the stock value per share: Stock Value per Share = [Expected Dividends or Free Cash Flows] / [Required Rate of Return - Growth Rate] Since ABC Corp. has no debt or preferred stock, and the free cash flows are expected to grow at a constant rate, we can use them as if they were dividends. So, the modified formula becomes: Stock Value per Share [Expected Free Cash Flows * (1+ Growth Rate)]/[Required Rate of Return - Growth Rate] You are given the following information: Expected Free Cash Flows next year = $30 million Growth Rate = 3.5% Required Rate of Return (WACC) = 11% Plug in these values in the modified formula to get stock value per share: Stock Value per Share = [30(1+0.035)]/[0.11-0.035] Contextualize and explain your results in at least 75 words: 5 PQR Corp. shares currently sell for $37. It just paid a dividend of $2.25, and expected to grow at a constant rate of 4% per year. What will be the expected stock price next year and the required rate of return? Hint: We can use the Gordon Growth Model (Dividend Discount Model) to calculate the expected stock price next year : P D*(1+g) (r-g) Where: Do current dividend ($2.25) g=constant growth rate of dividends (4%) r = required rate of return Using DDM we can calculate expected stock price next year as: P = [2.25 * (1.04)]/ (r-0.04) We also know that expected stock price next year will increase with the growth in dividends as: P = P *(1+ g) = 37 *(1+0.04) Using the two equations through substitution will give us the required rate of return (r): Contextualize and explain your results in at least 75 words:
Expert Answer:
Related Book For
Posted Date:
Students also viewed these finance questions
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
QUIZ... Let D be a poset and let f : D D be a monotone function. (i) Give the definition of the least pre-fixed point, fix (f), of f. Show that fix (f) is a fixed point of f. [5 marks] (ii) Show that...
-
Prepare adjusting journal entries, as needed, considering the account balances excerpted from the unadjusted trial balance and the adjustment data. A. depreciation on buildings and equipment, $17,500...
-
Two opposing armies, Red and Blue, must each decide whether to attack or defend. These decisions are made without knowledge of the opposing army's decision. The payoff table, in terms of value of...
-
Examine the role wireless networks are having in the developing world. Why are some places bypassing LANs and physical cabling altogether and moving to a wireless system architecture? What are the...
-
Robert Carr is the founder of Heartland Payment Systems, Inc. Carr was heavily involved in negotiations with Global Payments, Inc., concerning the acquisition of Heartland by Global. During this...
-
Joey Cuono started his own consulting firm, Cuono Company, on June 1, 2014. The trial balance at June 30 is shown below. In addition to those accounts listed on the trial balance, the chart of...
-
6) You must show the working to earn marks The height y (in feet) of a punted football is given by 20 9 y= + -x+1.6 2025 5 where x is the horizontal distance (in feet) from the point at which the...
-
Pacifico Company, a U.S.-based Importer of beer and wine, purchased 1,500 cases of Oktoberfest-style beer from a German supplier for 375,000 euros. Relevant U.S. dollar exchange rates for the euro...
-
A Chinese financial company hires a company in New York to design its new building in Shanghai. They pay $500,000 using a deposit from bank of China show using a debit/credit table how this would...
-
An epicyclic gear train consists of a sun wheel S, a stationary internal gear E and three identical planet wheels P carried on a star shaped planet carrier C. The size of different toothed wheels are...
-
An aircraft is flying at an altitude of 9000 m above a city. If the ground atmospheric pressure in the city is 101.2 kPa, what will be the pressure at the altitude where the aircraft is flying in...
-
1) Simplify this expression: (bmm + aki aij) Jay
-
Overhead costs include: Select one: a. a Direct costs only b. Indirect costs only. c. Direct and indirect costs. d. Neither direct nor indirect costs.
-
An electronics company wanted to determine a fair market price for their phones. They took a random sample of 40 phones currently on the market and fit a multiple regression model to predict the...
-
For any real number p we may express (1 + x)P as a power series (1 + x) = 1 + px + p(p-1)+ 2! k=D0 IIp-j) The series, called the binomial series converges for -1
-
Define a traverse in Surveying?
-
Suppose AMC waits until after the news comes out to do the share repurchase. What would AMCs share price be after the repurchase if its enterprise value goes up? What would AMCs share price be after...
-
Suppose your firm receives a $5 million order on the last day of the year. You fill the order with $2 million worth of inventory. The customer picks up the entire order the same day and pays $1...
-
In July 2007, Apple had cash of $7.12 billion, current assets of $18.75 billion, and current liabilities of $6.99 billion. It also had inventories of $0.25 billion. a. What was Apples current ratio?...
-
The following actual balance sheet was prepared for Martins Musical Supplies Ltd as at 30 September 2020. At 30 September, you are also provided with the following information. 1. Sales forecasts...
-
Based on your reading of this chapter, the following job description, and the two rsums below, analyze the two applicants for the position. What are their strengths and weaknesses as highlighted by...
-
Write a rsum that you could use in your job search. As your instructor directs, a. Write a rsum for the field in which you hope to find a job. b. Write two different rsums for two different job paths...
Study smarter with the SolutionInn App