1. Bond prices and yields.  

  

 Assume that the Christianson Corp. $1,000-par-value bond has a 5.700% coupon, matured on May 15, 2017, had a current price quote of 97.708, and had a yield to maturity (YTM) of 6.034%. 

Given this information, answer the following questions: 

  

a.    What was the dollar price of the bond? 

b.    What is the bond’s current yield? 

c.    Is the bond selling at par, at a discount, or at a premium? Why? 

d.    Compare the bond’s current yield calculated in part b to it’s YTM and explain why they differ. 

  

  
2. Basic bond valuation. 

  

JD Designs Inc. has an outstanding issue of $1,000-par-value bonds with a 12% 

coupon interest rate. The issue pays interest annually and has 16 years remaining to its maturity date. 

  

a.    If bonds of similar risk are currently earning a 10% rate of return, how much should JD Designs Inc. bond sell for today? 

b.    Describe the two possible reasons why the rate on similar-risk bonds is  below the coupon interest rate on the JD Designs Inc bond. 

c.    If the required return were at 12% instead of 10%, what would the current value of JD Designs' bonds be? Contrast this finding with your findings in part a and discuss. 

  

  

3. Common stock value – Constant Growth 

  

Darlington Inc. common stock paid a dividend of $1.20 per share last year. The company expects earnings and dividends to grow at a rate of 5% per year for the foreseeable future. 

  

a.    What required rate of return for this stock would result in a price per share of $28? 

b.    If Darlington Inc. expects both earnings and dividends to grow at an annual rate of 10%, what required rate of return would result in a price per share of $28?