1. Dexter Mills issued 20-year bonds a year ago at a coupon rate of 10.2 percent
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Question
1. Dexter Mills issued 20-year bonds a year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments. The yield-to-maturity on these bonds is 9.2 percent. What is the current bond price?
2. Jen's Fashions is growing quickly. Dividends are expected to grow at a 19 percent rate for the next 3 years, with the growth rate falling off to a constant 8 percent thereafter. The required return is 12 percent and the company just paid a $3.80 annual dividend. What is the current share price?
3. Hardwoods, Inc. is a mature manufacturing firm. The company just paid a $10 dividend, but management expects to reduce the payout by 9 percent each year, indefinitely. How much are you willing to pay today per share to buy this stock if you require a 15 percent rate of return?
4. A 10-year, 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value. The bond is currently quoted at 98.7. What is the clean price of this bond if the next interest payment will occur 2 months from today?
(IF YOU DONT MIND PLEASE PROVIDE HOW YOU GOT YOUR ANSWER PLEASE)
Explanation / Answer
1. Bond value can be calculated in Excel as =PV(4.6%,38,-51,-1000), where the first parameter is the semiannual yield of 9.2%/2=4.6%, the second parameter is the number of semiannual periods left of 19yrs*2 = 38 semiannual periods, the third parameter is the semiannual coupon of 10.2%*1000/2 = 51 and the fourth parameter is the par value of 1000
This value is equal to $1089.02
2. D1=3.8*1.19 = 4.522
D2 = 4.522*1.19 = 5.381
D3 = 5.381*1.19 = 6.404
D4 = 6.404*1.08 = 6.916
Price after yr 3 (P3) = D4 / (required return-growth rate) = 6.916/(12%-8%) = 172.897
So current price = D1/1.12^1 + D2/1.12^2 + D3/1.12^3 + P3/1.12^3
= 4.522/1.12 + 5.381/1.12^2 + 6.404/1.12^3 + 172.897/1.12^3
= $ 135.95
3. D1 = 10*(1-9%) = 9.1
Price = D1/(required return-growth rate), where the growth rate = -9%
So price = 9.1/(15%-(-9%)) = 9.1 / 24% = $ 37.92
4. Clean price = quote/100*par value = 98.7/100*1000 = $ 987
Hope this helped ! Let me know in case of any queries.
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