Bond Values and Stock Prices
Not what you're looking for?
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.
Purchase this Solution
Solution Summary
The solution calculates the bond values and stock prices. The expected price for current market interest rates are given.
Solution Preview
See attached file
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 ...
Purchase this Solution
Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium
The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.
Basics of Economics
Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.
Economic Issues and Concepts
This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.
Pricing Strategies
Discussion about various pricing techniques of profit-seeking firms.
Elementary Microeconomics
This quiz reviews the basic concept of supply and demand analysis.