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Calculating Value of a Bond and a Preferred Stock

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Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is

a. 7 percent
b. 10 percent
c. 13 percent

North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed divident of $6 per share. With the passage of time, yields have soared from the original 6 percent to 14 percent (yield is the same as required rate of return).

a. What was the original issue price
b. What is the current value of this preferred stock?
c. If the yield on the Standard & Poor's Preferred Stock Index declines, how will the price of the preferred stock be affected?

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Solution Summary

This posting illustrates how to calculate the value of a bond and a preferred stock by taking two examples. In the first example, the value of the bond is calculated at three different yields to maturity levels. The second example calculates the current value of an outstanding preferred stock and discusses what will happen to its price if the yield on the Standard & Poor's Preferred Stock Index declines.

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Q1:
Bond Value = Coupon payment/r*(1-1/(1+r)^n) + face value / (1+r)^n
a. Bond value at 7 percent = 80/7%*(1-1/(1+7%)^25)+1000/(1+7%)^25 =1116.535832

b. ...

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