Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
7th Edition
ISBN: 9780357033609
Author: Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher: Cengage Learning
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Textbook Question
Chapter 12, Problem 8FPE
Describe and differentiate between a bond’s (a) current yield and (b) yield to maturity. Why are these yield measures important to the bond investor? Find the yield to maturity of a 20-year, 9 percent, $1,000 par
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Consider a $1,000-par-value Bond with the following characteristics: a current market price of $761, 12 years until maturity, and an 8% coupon rate. We want to determine the discount rate that sets the present value of the bond’s expected future cash-flow stream to the bond’s current market price. You are required to determine the discount rate that equates the present value of the bond?
a.) what are the main characteristics of a bond? Provide examples of different types of bonds in terms of coupons and maturity.
b.) explain the difference between "coupon rate" and "yield to maturity ". Show using examples, how changes in the coupon rate and yield to maturity affects the bond price.
c.) You are asked to put a value on a bond which promises eight annual coupon of £50 and will repay its face value of £1000 at the end of eight years. You observe that other similar bonds have yields to maturity of 9per cent.
i.) How much is this bond worth?
ii.) You are offered the bond for a price of £755.5. What yield to maturity does this represent?
d.) You believe that next year XYZ plc will pay a dividend of £2 on its common stock. There after you expect dividend to grow at a rate of 4% a year in perpetuity. If you require a return of 12% on your investment.
i.) How much should you be prepared to pay for the stock?
ii.) Assuming that the expected stock price at the end of…
Suppose a seven-year, $1,000 bond with a coupon rate of 8.1% and semiannual coupons is trading with a yield to maturity of 6.27%.
a. Is this bond currently trading at a discount, at par, or at a premium? Explain.
b. If the yield to maturity of the bond rises to 7.28% (APR with semiannual compounding), what price will the bond trade for?
Chapter 12 Solutions
Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
Ch. 12 - Describe the various types of risks to which...Ch. 12 - Prob. 2LOCh. 12 - Prob. 3LOCh. 12 - Prob. 4LOCh. 12 - Prob. 5LOCh. 12 - Prob. 6LOCh. 12 - What makes for a good investment? Use the...Ch. 12 - An investor is thinking about buying some shares...Ch. 12 - The price of Outdoor Designs, Inc. is now 85. The...Ch. 12 - The Castle Company recently reported net profits...
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- Which of these two bonds offers the highest current yield? Which one has the highest yield to maturity? a. A 6.55 percent, 22-year bond quoted at 52.000 b. A 10.25 percent, 27-year bond quoted at 103.625arrow_forwardBond Yields and Rates of Return A 10-year, 12% semiannual coupon bond with a par value of 1,000 may be called in 4 years at a call price of 1,060. The bond sells for 1,100. (Assume that the bond has just been issued.) a. What is the bonds yield to maturity? b. What is the bonds current yield? c. What is the bonds capital gain or loss yield? d. What is the bonds yield to call?arrow_forwardSuppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for 1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years for a price of 1,050. (1) What is the bonds nominal yield to call (YTC)? (2) If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?arrow_forward
- Please see attached. Definitions: Yield to maturity (YTM) is the return the bond holder receives on the bond if held to maturity. Treasury note is a U.S. government bond with a maturity of between two and ten years. Current yield is the annual bond coupon payment divided by the current price.arrow_forwardYou are given the following information on two traded bonds making semi-annual coupon payments. Bond Face Value Coupon Maturity Price A $1,000 3% 12 years $850.10 B $1,000 10% 12 years $970.00 Calculate Yield to Maturity (YTM) for bonds A and B.arrow_forwardRank the durations or effective durations of the following pairs of bonds:a. Bond A is a 6% coupon bond, with a 20-year time to maturity selling at par value. Bond B is a 6% coupon bond, with a 20-year time to maturity selling below par value.b. Bond A is a 20-year noncallable coupon bond with a coupon rate of 6%, selling at par. Bond B is a 20-year callable bond with a coupon rate of 7%, also selling at par.arrow_forward
- Suppose a seven-year, $1,000 bond with a 5.98% coupon rate and semiannual coupons is trading with a yield to maturity of 4.01%. a. Is this bond currently trading at a discount, at par, or at a premuim? Explain. b. If the yield to maturity of the bond rises to 4.37% (APR with semiannual compounding), at what price will the bond trade?arrow_forwardCalculate the yield to maturity of a bond with the help of the following given information: - Market Price = $950 - Life of Bond =6 - Coupon Rate =13% - Face Value = $1000arrow_forward(i) Two types of risks faced by bodholders are interest rate risks and default risks? What are interest rate risks and default risks, and why might a bond exhibit more or less of these risks? (ii) You see a bond with the following characteristics: bond matures in 10 years coupon rate = 7% APR compounded semi-annually, paid semi-annually face value = $1000 bond price = $900 What is the yield to maturity (YTM) of this bond, stated as an APR with semi-annual compounding?arrow_forward
- Suppose a seven-year, $1,000 bond with a 11.53% coupon rate and semiannual coupons is trading with a yield to maturity of 9.06%. Is this bond currently trading at a discount, at par, or at a premuim? Explain. The bond is currently trading... (Select the best choice below.) A.... at a discount because the coupon rate is greater than the yield to maturity B.... at a premium because the yield to maturity is greater than the coupon rate C.... at par because the coupon rate is equal to the yield to maturity D.... at a premium because the coupon rate is greater than the yield to maturity 2. If the yield to maturity of the bond rises to 9.85% (APR with semiannual compounding), at what price will the bond trade?arrow_forwardA 10-year bond with a face value of $1,000 currently sells for $1,110. Which of the following statements is correct? Select one: a. The bond's current yield is equal to its coupon rate. b. The bond's coupon rate exceeds its current yield to maturity. c. None of the given answers is correct. d. The bond's yield to maturity is greater than its coupon rate.arrow_forwardPlease provide clear calculations/explanations, as indicated, for each of the following questions: What is the current price of a 10% coupon bond (with standard semiannual payments) if the yield-to-maturity on the bond is 5% (APR with semiannual compounding), the bond matures two years from today, and the bond has a face value of $1,000? Describe two reasons the yield-to-maturity of the bond might increase. What will happen to the price of the bond when the YTM increases? For a given change in yield-to-maturity (e.g., 100 bps), will a short-term or long-term bond have a bigger percentage change in price? What is the relationship between coupon rates and yield-to-maturity for bonds selling at a premium? at a discount? at par value?arrow_forward
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