Question

1. Price of a 10 year bond with an 8% coupon rate is currently 80. If interest on the bond is paid semiannually, the bond's yield to maturity is ____

2. If Yield to maturity is more than its coupon rate, a bond will sell at a _____ and as the bond approaches maturity, the price will approach _____

3. FF pays dividends quarterly. The next dividends is 15 cents and will be paid 3 months from today. Suppose future dividends will be growing at 2% per quarter. We have equivalent quarterly required rate of return is 6,66%. Assume the dividends will continue to be paid and will grow forever. What is the valuation of FF?

4. Ben paid dividends quarterly. The next dividends is 25 cents and will be paid 3 months from today. Suppose future dividends will be growing at 1.5% per quarter. We require 20% return/ year (EAR). What is the equivalent quarterly required rate of return?

Answer 1

Answer to Question 1:

Par Value = $1,000

Current Price = 80% * $1,000
Current Price = $800

Annual Coupon Rate = 8.00%
Semiannual Coupon Rate = 4.00%
Semiannual Coupon = 4.00% * $1,000
Semiannual Coupon = $40

Time to Maturity = 10 years
Semiannual Period = 20

Let Semiannual YTM be i%

$800 = $40 * PVIFA(i%, 20) + $1,000 * PVIF(i%, 20)

Using financial calculator:
N = 20
PV = -800
PMT = 40
FV = 1000

I = 5.70%

Semiannual YTM = 5.70%
Annual YTM = 2 * 5.70%
Annual YTM = 11.40%

Answer to Question 2:

If Yield to maturity is more than its coupon rate, a bond will sell at a discount and as the bond approaches maturity, the price will approach par value