Question

1. A $1,000 par value bond’s coupon rate is 4 percent per year but it pays coupon twice a year. The yield to maturity is 6 percent p.a. and it has 10 years to maturity. If the yield to maturity remains unchanged, what is the price 3 years from now? (please round to cent)
2. A $1,000 par value bond’s coupon rate is 4 percent per year but it pays coupon twice a year. The yield to maturity is 6 percent p.a. and it has 10 years to maturity. If the yield to maturity remains unchanged, what is the price 3 years from now? (please round to cent)

2. BBM Co. stock just paid $2.00 dividend per share. The market expects that the dividend will grow at 5% annually for the next 3 years and then 2% annually forever. Assuming a required return of 8%, how much is the present value of the stock? (please round to cent)

Answer 1

Answer to Q#1 (First question in the list): Semiannual Yield to Maturity, RATE # of semiannuals to maturity, NPER Semiannual coupons payments, PMT Bond's Maturity Value at the end, FV Semiannual coupon type, TYPE Bond's price after 3 years from now 3% [6% / 2 --> Annual interest rate is converted into semiannual rate] 14 [7 years x 2 --> As there will be 2 semiannual per year & 3 years would be elapsed out of 10 years] $20 ($1000 x 4% / 2 --> As coupons are payable semiannually at coupon rate on bond's par value] $1,000 [Par value at maturity] 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. $887.04 [Ref: NOTE] NOTE: Bond Price after 3 years from now is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=3%; nper-14; pmt=-20; fv=-1000; type=0; Here, pmt & fv are negative as they denote cash inflow; type=0 as coupons are paid at the end of each semiannual only. B 1 Semiannual Yield to Maturity, RATE 2 # of semiannuals to maturity, NPER 3 Semiannual coupons payments, PMT 4 Bond's Maturity Value at the end, FV 5 Semiannual coupon type, TYPE 6 Bond's price after 3 years from now C D E F G H I J K =6%/2 [6%/2 --> Annual interest rate is converted into semiannual rate) = (10-3)*2 [7 years x 2 --> As there will be 2 semiannual per year & 3 years would be elapsed out of 10 years) =1000*4%/2 ($1000 x 4% / 2 --> As coupons are payable semiannually at coupon rate on bond's par value] $1,000 [Par value at maturity] 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. =PV(B1,B2,-B3,-B4,B5) [Ref: NOTE]