a. Find the current price of 30 day commercial paper issued with a yield of 1.25

Question

a. Find the current price of 30 day commercial paper issued with a yield of 1.25% and with face value of $100,000.

b. Domenic purchases a newly issued 4 year bond priced at $1015 with par value of $1000. It pays $100 interest yearly. What is the coupon rate, the current yield and the yield to maturity?

c. Domenic also purchases a share of General Electric stock for $14 at the beginning of the year. During the course of the year he receives dividends totaling $1.15. He sells the stock to Elliana for $16.75 at the end of the year. What is his holding period return?

d. Elliana buys the stock at $16.75 from Domenic. Using the current dividend (now time = 0) of $1.15 and a predicted growth rate of 3%, what is GE’s required rate of return, r?

e. Instead, just as Elliana purchases the stock, GE announces that it will be distributing all of its earnings in the form of a dividend (i.e. retaining no earnings). The dividend announced is $2.00. What is the price of the stock now (assume the required rate of return did not change from part c)?

Explanation / Answer

a.       Current yield      = Coupon payment/Current price of the bond       Coupon payment of the bond   = 30*1.25%*$100,000/365                                                      = $102.73          0.0125            = $102.73/Current price of the bond          Current price of bond   = $102.73/0.0125                                              = 8219.17          Current price of the bond is $8,219.17 b.          Current yield      = Coupon payment/Currrent price of the bond                                    = $100/$1015                                    =0.0985    Therefore current yield is 9.85% Calcualation of Yield to maturity:    By using excel spread sheet we can calculate the Yield to maturity. Inset Rate in formula bar and take the values as Nper = 4, PMT =100, PV = -1015, FV = 1000 By enter we can get the value as 0.09531       Therefore yield to maturity is 9.531%. c.    Holding period return      = (Income + (Ending value - Beginning value)/Beginning value                                          = (1.15 + 16.75 - 14)/14                                          = 3.9/14                                          = 0.278       Holding period return is 27.8% d. By dividend growth model, required rate of return    = D0(1+g)/P0 +g                                                                                =1.15*(1.03)/16.75 + 3%                                                                                = 1.1845/16.75 + 0.03                                                                                = 0.0707 + 0.03                                                                                =0.1007       Required rate of return is 10.07% e.       Price of the stock   =Dividend/ Required rate of return                                    = 2/0.0278                                    =71.9       Price of the stock is $71.9       Required rate of return is 10.07% e.       Price of the stock   =Dividend/ Required rate of return                                    = 2/0.0278                                    =71.9       Price of the stock is $71.9

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.