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Yield of a Bond that Trades at a Discount

Fin 534

Chapter 8 Problem 9

Explain why the yield of a bond that trades at a discount exceeds the bond's coupon rate?

Chapter 8 Problem 24

Assume there are four default-free bonds with the following prices and future cash flows:

Cash flows
Bond Price Today Year 1 Year 2 Year 3
A $934.58 1000 0 0
B 881.66 0 1000 0
C 1,118.21 100 100 1100
D 839.62 0 0 1000

Do these bonds present and arbitrage opportunity? If so, how would you take advantage of the opportunity? If not, Why not?

Chapter 9 Problem 5

NoGrowth corporation currently pays a divedend of $2 per year, and it will continue to pay this dividend forever. What is the priceper share if its equity cost of capital is 15% per year?

Chapter 9 Problem 12

Colgate-Palmolive Company has just paid an annual dividend of $0.96. Analysts are predicting an 11% per year growth rate in earnings over the next five years. After then, Colgate's earning are expected to grow at the current industry average of 5.2% per year. If Colgate's equity cost of capital is 8.5% per year and its dividend payout ratio remains constant, what price does the dividend-discount model predict colgate stock should sell for?

Chapter 9 Problem 21

Consider the valuation of Kenneth Cole Production in Example 9.7.

a. suppose you believe KCP's initial revenue growth rate will be between 4% and 11% (with growth slowing in equal steps to 4% byyear 2011). What range of share prices for KCP is consistent with these forecasts?

b. Suppose you believe KCP's EBIT margin with be between 7% and 10% of sales. What range of share prices for KCP is consistent with these forecasts (keeping KCP's initial revenue growth at 9%)?

c. Suppose you believe KCP's weighted average cost of capital is between 10% and 12%. What range of share prices for KCP is consistent with these forecasts (keeping KCP's initial revenue growth and EBIT margin at 9%)?

d. What range of share prices is consistent if you vary the estimate as in parts (a), (b), and (c) simultaneously?

Solution Preview

See the attached file.

Explain why the yield of a bond that trades at a discount exceeds the bond's coupon rate?

The yield comprises on the capital gains yield and the current yield due to the ...

Solution Summary

The solution discusses the yield of a bond that trades at a discount exceeds the bond's coupon rate.

$2.19