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Valuation: Zero-Coupon, Convertible, and Corporate Bonds

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1. Valuation - zero-coupon bond
A U.S. Government bond with a face amount of $10,000 with 8 years to maturity is yielding 3.5%. What is the current selling price?

2. Valuation - convertible bond
You purchased one of AAA Corp.'s 9%, 15-year convertible bonds at its $1,000 par value a year ago when the company's common stock was selling for $25. Similar bonds without a conversion feature returned 10% at the time. The bond is convertible into stock at a price of $35. The stock is now selling for $40.

Assume no dividends.
a) You exercise the conversion feature today and immediately sold the stock you received. Calculate the total return on your investment.
b) What would your return have been if you had invested $1,000 in AAA's stock instead of the bond?

3. Valuation - preferred stock
What is the value of a share of preferred stock that pays a $9.50 dividend, assume k is 12%.

4. Valuation - corporate bond
A $1,000 corporate bond with 10 years to maturity pays a coupon of 8% (semi-annual) and the market required rate of return is a) 7.2% and b) 10%. What is the current selling price for a) and b)?

5. Valuation - options

The following information refers to a six-month call option on the stock of XYZ, Inc.

Price of the underlying stock: $50.
Strike price of the three-month call: $45.
Market price of the option: $10.

a) What is the intrinsic value of the option?
b) What is the option's time premium at this price?

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Solution Summary

A U.S. Government bond with a face amount of $10,000 with 8 years to maturity is yielding 3.5%. Solution helps in finding the current selling price.