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Bond and current stock price

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1. A newly issued corporate bond has 20 years to maturity. The bond has a coupon rate of 8 percent and pays interest semiannually. Also the bond is callable in 6 years at a call price equal to 115 percent of par value. The par value of the bonds is #1,000. The yield to maturity is 7 percent.
a. What is the bonds price today?
b. What is the bonds current yield?
c. What is the bonds yield to call?
d. What will be the bonds price one year from today?

2. Stewart Industries just paid a $2.40 per share dividend on its common stock yesterday (Do=$2.40) The dividend is expected to grow at a constant rate of 5 percent a year forever. The stocks beta is 1.2, the risk free rate of interest is 6 percent, and the rate of return on the market is 11 percent.
a. What is the company's current stock price?
b. What is the required rate of return on the stock?
c. What is the price of the stock at the end of year 3?
d. What should be the stock price today?

Solution Preview

1. A newly issued corporate bond has 20 years to maturity. The bond has a coupon rate of 8 percent and pays interest semiannually. Also the bond is callable in 6 years at a call price equal to 115 percent of par value. The par value of the bonds is $1,000. The yield to maturity is 7 percent.

a. What is the bonds price today?

We need to calculate how much the bonds have been issued by using the formula as follows: -

where B is the bond price
C is the coupon payment
r is the market interest rate
n is the period

Since, its remaining life is 20 years. You need to multiply the remaining life by 2 because the company pays interest semiannually.
Coupon payment is equal to $1,000 x 8% = 80/2 = $40
The market interest rate should also be divided by 2. = 7%/2 = 3.5%

The ...

Solution Summary

This solution is comprised of a detailed explanation to compute bonds price, current yield, yield to call, and stock price.

$2.19