Question

estio You are considering investing in a bond that pavs 6% semi-annual coupons with $1,000 face value and 10 years to maturity Ifyou have bought the bond todav at a veld (APR) of 5%, what is vour purchase price? Is this a par, discount or premium bond? Explain. (a) (5 marks) One year later, the bond's YTM (APR) has gone up to 6% and you sell it immediately after receiving the coupons. (i) What is the bond's current yield? (ii) Under what condition will current yield and coupon rate be the same in value? (ii) What is the capital gains yield? (b) (2 marks) (2 marks) 5 marks) Boon Star Limited just distributed a dividend of $2. It is expected that Boon Star will increase its dividend by 20% in the coming year, 15% in the second year, 10% in the third year, and 5% in the fourth year. Starting from the fifth year, Boon Star will maintain the dividend growth rate at 5% per year. How much should the stock of Boon Star be worth today if the yearly required rate of retum is 9%? (8 marks) Assume the risk-free rate is 4% and the market retum is 10% Beta 1.6 Current price 35 Stock A According to the Capital Asset Pricing Model (CAPM), what is the required retum of Stock A? 3 marks)

Answer 1

First question in the list): Answer to Q#1 ( $1,077.95 [it is issued at premium, higher than par value, as interest rate is less than bond's coupon rate] a) Bond's price today 6.0% [(Annual coupon / Bond price: $60.00 / $1,000-6.0%) b-i) Bond's current yield 1-year later b-ii) When coupon rate and market yield rate are same, the coupon rate and current yield will be the same because bonds will be traded at par b-iii) Capital gain yield 1-year later 7.23% [Change in bond price / Bond price today-($1,000.00-$1,077.95) / $1,077.95-.7.23%) Workings: Today1-year later 3.0% [Todays 5% / 2; 1-year later 6%/2--> APR is converted to semiannual rate 2.5% 20 $30.00 $1,000 0 $1,077.95 Semiannual Interest rate, RATE # of semiannuals to maturity, NPER Semiannual coupon payment, PMT Maturity value at the end, FV Semiannual coupon type, TYPE Bond's price 18 [Today 10 years x 2; 1-year later 9 years x 2; as there are 2 semiannuals per year] $30.00 [$1,000 x 6%/2 as coupons are paid 2 times a year] 1,000 [Par value of the bond] 0-0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period $1,000.00 [Ref: NOTE-11

NOTE-1: Bond's Price is calculated using EXCEL FUNCTION PV(rate,nper,pmt,f,type) where rate-2.5% or 3.0%; nper-20 or 18, pmt=-30.00; fv=-1000; type-0. Here, value for pmt& fv are negative as they denote cash inflows; type 0 because coupons paid at the end of each semiannual only 2Semiannual interestrate, RATEToday 1-year later 5%/2 -10 2 -85°696/2 $1,000 -6%)2 [Todays 5% / 2; 1-year later : 6%/2 ..> APR is converted to semiannual rate) 3 # of sem!annuals to maturity, NPER 4 Seiannual coupon payment, PMT 5 Maturity value at the end, FV 6 Semiannual coupon type, TYPE 7Bond's price 92 [Today 10 years x 2; 1-year later 9 years x 2; as there are 2 semiannuals per year] -c5*696/2 [S1,000 x 6%/2 as coupons are paid 2 times a year] 1,000 [Par value of the bond] 0-0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. PV(82,83, B4,-B5,B6) PV/C2,C3,CA,C5,C6) [Ref: NOTE-11