Question

4. You bought a callable bond at the face value two years ago. The bond has a four- year maturity, a 10 percent annual coupon, a $1,000 face value, and a $1,021 call price. Suppose the bond is called immediately after you have received the second coupon payment. What is the bond's yield to call? A) 10% B) 11% C) 12% D) 14% 5. A corporate bond matures in one year. The bond promises a $50 coupon and principal of $1,000 at maturity. Suppose the bond has a 10 percent probability of default and payment under default is $400. If an investor buys the bond for $907.14, calculate the promised yield on the bond. A) 5 percent B) 6.6 percent C) 8.58 percent D) 15.75 percent 6. A company is 100 percent financed by equity capital and has two million shares outstanding. It is expected to earn a constant $20 million per year on its assets and will pay out all future earnings as dividends. If the cost of equity capital is 10%, what is the value of each share of the company's stock? A) $50 B) $100 C) $150 D) $200

Answer 1

Answer to Q#4 (First question in the list): Option-(B): 11% Reason: # of years to call, NPER 2 $100 [$1000 x 10% Annual coupon payment, PMT Bond's purchase price, PV $1,000 [Face value of the bonds] Bond's call price, FV $1,021 0 0 if paid at the end of each year; 1 if paid at the beginning of each year 11.00% [Ref: NOTE] Coupon payment type, TYPE Bond's yield to call (YTC) NOTE: Bond's yield to call (YTC) is calculated using EXCEL FUNCTION RATE(nper,pmt,pv,fv,type) where nper 2; pmt--100; pv-1000; fv-1021; Here, pmt & fv are negative as they denote cash inflows; pv is positive as it denotes cash outflow; type-0 as coupons paid at the end of each year only А E F Н #of years to call, NPER Annual coupon payment, PMT 2 $100 [$1000 x 10% $1,000 [Face value of the bonds] $1,021 2 Bond's purchase price, PV Bond's call price, FV 3 4 0 0 if paid at the end of each year; 1 if paid at the beginning of each year 5 Coupon payment type, TYPE 6 Bond's yield to call (YTC) =RATE (B1,-B2,B3, - B4, B5) [Ref: NOTE] 7