5.a)The Australian government has just issued treasury bonds with a par value of

Question

5.a)The Australian government has just issued treasury bonds with a par value of $1,000, a maturity of 14 years and annual coupon rate of 9 percent. The current market price of the treasury bonds is $1,100.
(i) Calculate the bond's expected rate of return. ( don't have the price of the bond? is it 90* PVIFA(r, 14years) + 1100*PVIF(r,14years) = 1100?)
(ii) How much would you pay for the bond if your required return is 10 percent? Show your workings.
b)Gree's preference shares are selling for $3.50 in the market and pay a 40 cent dividend.
(i) What is the expected rate of return on the preference share? (answer: Kps= 0.40/ 3.50?)
(ii) If an investor's required rate of return is 10 percent, how much would this investor be willing to pay to purchase the preference share? (this use V=D/K? V= 0.40/0.10?)

Explanation / Answer

a) 1)Bond expected rate of return = 1100= 90* PVIFA(r, 14years) + 1000*PVIF(r,14years) The computation of expected return we have to go through the Ttrail and error mentho. Meaning that where the expected rate of return is equas with ts current maker price opd $1100. for shart cut we can calicuate in this way .. ytm = c+(m-p)/n / [ 0.4m+0.6p] = 90+(1000-1100)/14 / [ 0.4*1000+0.6*1100] =90+(-100/14) / [400+660] = 90 -7.14 / 1060 = 82.85 / 1060 = 7.81% 2)if i need r = 10 then i will pay = 90*PVIFA (10%, 14years) + 1000*PVIF(10%,14years) =90*7.367 +1000*0.263 =663.03+263 =$926.03 I would pay the maximum amount 926.03 fo this bond.. b) 1)here Dp = $0.40 Market price (Vp)= $3.50 1) Expected return (r) = Dp / Vp = 0.40 / $3.50 =3.5 =11.43%. 2) If r = 10% 10% = 0.4 / Vp Vp *10% = 0.4 Vp = 0.4 / 10% = $4 If required 10% return then he can pay $4..

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