(a) Jocelyn has just bought a 4% bond that pays quarterly coupons with $1,000 face value and 5 years to maturity.

i) If the yield (APR) of the bond was 6%, what was its purchase price?

ii) If the bond's YTM (APR) drops to 5% six months later and Jocelyn sells it immediately after receiving the coupon for the quarter, calculate the 6-month capital gains yield.

iii) Suppose the bond Jocelyn purchased was a semi-annual coupon bond (instead of a quarterly coupon bond), could the 6-month total yield be computed as the sum of the current yield and the 6-month capital gains yield? Explain.

(b) ABC Ltd. has just distributed a dividend of $4. It is expected that the company will increase its dividend by 18% in the coming year, and 12% in the second year and third year. Starting from the fourth year, the company will maintain the dividend growth rate at 10% per year forever. How much would Stock ABC be worth today if its yearly required rate of return is 12%?

Answer rating: 100% (QA)

a Jocelyns Bond i Purchase Price Coupon rate 4 per year quarterly 1 per quarter Face value 1000 Yield APR 6 We can use the bond valuation formula to f... View the full answer