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Bond Values and Stock Prices

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Part a

Assume you hold a corporate bond with a $1,000 par value paying a 7 ⅝ coupon rate that has two years left until maturity. Calculate the value of the bond if the current market interest rate on a bond of this risk is 9 %.

Part b

Assume that you hold a share of common stock that will pay a dividend of $5.00 per share for the next three years. At the end of the third year, you expect the price per share to be $50. Calculate the value of the stock if your required rate of return is 11 %.

Part c

Calculate the price of a share of stock that is expected to pay a $15 dividend in perpetuity if the stock is priced to yield an 11.5% rate of return.

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Solution Summary

The solution calculates the bond values and stock prices. The expected price for current market interest rates are given.

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Bond Values and Stock Prices
Part a

Assume you hold a corporate bond with a $1,000 par value paying a 7 ⅝ coupon rate that has two years left until maturity. Calculate the value of the bond if the current market interest rate on a bond of this risk is 9 %.

7 5/8 = 7.625%
Discount rate= 9.000%
We assume that the bond pays semi annual interest
To calculate the price of the bond we need to calculate / read from tables the values of
PVIF= Present Value Interest Factor
PVIFA= Present Value Interest Factor for an Annuity
Price of bond= PVIF * Redemption value + PVIFA * interest payment

Price of bond
Coupon rate= 7.625%
Face value= 1000
Payment S Semi Annual
No of years= 2
No of Periods= 4
Discount rate annually= 9.00% annual
Discount rate per period= 4.50%
n= 4
r= 4.50%

Interest payment= 38.125 Semi Annual =(7.625%/2)*1000
Redemption ...

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