Question

1) A company has an 8.8 percent coupon bond outstanding that matures in 12 years. The bond pays interest quarterly. What is the market price per bond if the face value is $1,000 and the yield to maturity is 5.4 percent?

2) If we require a 13% real return and we expect inflation to be 7%, what is the nominal rate using the accurate Fisher Effect?

3) A company is expected to increase dividends by 20% in one year and by 15% in two years. After that, dividends will increase at a rate of 5% per year indefinitely. The last dividend was $1, the required return is 12%, what is the current price of the stock?

Answer 1

Hi, As per the HOMEWORKLIB RULES, in case of multiple questions, I need to solve the first question.

The value of the bond is computed as shown below:

The coupon payment is computed as follows:

= 8.8% / 4 x $ 1,000 (Since the payments are being made quarterly, hence divided by 4)

= $ 22

The YTM is computed as follows:

= 5.4% / 4 (Since the payments are being made quarterly, hence divided by 4)

= 1.35% or 0.0135

N is computed as follows:

= 12 x 4 (Since the payments are being made quarterly, hence multiplied by 4)

= 48

So, the value of the bond is computed as follows:

= Coupon payment x [ [ (1 - 1 / (1 + r)ⁿ ] / r ] + Par value / (1 + r)ⁿ

= $ 22 x [ [ (1 - 1 / (1 + 0.0135)⁴⁸ ] / 0.0135 ] + $ 1,000 / 1.0135⁴⁸

= $ 22 x 35.15826302 + $ 525.3634492

= 1,298.85 Approximately

Feel free to ask in case of any query relating to this question