Question

1. What is a bond?

2. Does a zero-coupon bond pay interest? Explain your answer.

3. Endicott Enterprises Inc. has issued thirty-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 14% and the current yield to maturity is 8%, what is the firm’s current price per bond?

4. Delagold Corporation is issuing a zero-coupon bond that will have a maturity of fifty years. The bond’s par value is $1,000, and the current yield to maturity on similar bonds is 7.5%. What is the expected price of this bond using a semi-annual interest?

5. Kwak Motors Inc. pays a $1.77 preferred dividend every quarter and will maintain this policy forever. What price should you pay for one share of preferred stock if you want an annual return of 9.25% on your investment?

6. Miles Hardware has an annual cash dividend policy that raises the dividend each year by 3%. Last year’s dividend was $1.00 per share. Investors want a 15% return on this stock. What is the stock’s price?

7. Reco Corp. is expected to pay a dividend of $0.75 next year. The forecast for the stock price a year from now is $62.80. If the required rate of return is 7 percent, what is the current stock price?

Answer 1

1. Bonds are debt instruments issued to raise capital funds for investing in the projects. Bonds will have following Characteristics:

a. Bond Generates fixed income to the holder

b. Bond will be repaid on the maturity date at either face or specified value

Ex: Municipal Bonds and Corporate Bonds

2. Zero Coupon Bonds as it name implies doesn't pay any interest but they will pay at maturity because they will be issued at very low rate.

3. Current Price of Bond = Semi Annual Interest * PVAF ( 4%, 60) + Maturity Amount * PVF ( 4%, 60)

Current Price of Bond = 70 * $22.62 + 1000 * 0.09506

Current Price of Bond = 1583.40 + $95.06

Current Price of Bond = $1678.46

4. Expected Price = Maturity Amount * PVF ( 3.75%, 100)

Expected Price = 1000 * 0.2519

Expected Price = $25.19

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