As an investor, you are considering an investment in the bonds of the Conifer Coal Company. The bonds, which pay interest semiannually, will mature in 8 years, and have a coupon rate of 7.5% on a face value of $1000. Currently, the bonds are selling for $900.
a. If your required return is 9% for bonds in this risk class, what is the highest price you would be willing to pay? (Note: Use the Pv function)
b. What is the current yield of these bonds? If you hold the bonds for 1 year, what total rate of return will you earn? Why are these 2 number different?
c. What is the current yield to maturity on these bonds if you purchase them at the current price? (Note: Use the Rate function.)
d. If the bonds can be called in 3 years with a call premium of 4% of the face value, what is the yield to call on these bonds?(Note: Use the Rate function)
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Stock Valuation versus Bond Valuation
Why is stock valuation considerably less precise than bond valuation? Can you give at least two reasons. Would it be possible to provide some industry references?
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