Scribd
Upload
535 views

Problem

The document discusses bond valuation for three bonds (A, B, C) that mature in 12 years and have face values of $1,000 but different coupon rates. It indicates that Bond A trades at a discount, Bond B at par, and Bond C at a premium based on their coupon rates relative to the 9% yield to maturity. It then calculates the prices of each bond using a spreadsheet and finds them to be $856.79 for Bond A, $1,000 for Bond B, and $1,143.21 for Bond C. The document also provides two examples of preferred stock valuation, finding the value of a preferred stock to be $125 given a 10% dividend and 8% yield, and $

Uploaded by

Nicole Labbao
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
535 views

Problem

The document discusses bond valuation for three bonds (A, B, C) that mature in 12 years and have face values of $1,000 but different coupon rates. It indicates that Bond A trades at a discount, Bond B at par, and Bond C at a premium based on their coupon rates relative to the 9% yield to maturity. It then calculates the prices of each bond using a spreadsheet and finds them to be $856.79 for Bond A, $1,000 for Bond B, and $1,143.21 for Bond C. The document also provides two examples of preferred stock valuation, finding the value of a preferred stock to be $125 given a 10% dividend and 8% yield, and $

Uploaded by

Nicole Labbao
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Nicole Kyle A.

Labbao Security Analysis


4FM4, Sat 7:00-10:00 Prof. Cesar Cruel

PROBLEM
7-20 (BOND VALUATION)

Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate
bonds. His financial planner has suggested the following bonds:

Bond A has a 7% annual coupon, matures in 12 years, and has a $1,000 face value.

Bond B has a 9% annual coupon, matures in 12 years, and has a $1,000 face value.

Bond C has an 11% annual coupon, matures in 12 years, and has a $1,000 face value.

Each bond has a yield to maturity of 9%.

a. Before calculating the prices of the bonds, indicate whether each bond is trading at a
premium, at a discount, or at par.

Answer:

Bond A is selling at a discount because its coupon rate (7%) is less that the going interest rate
(YTM=9%)

Bond B is selling at par because its coupon rate (9%) is equal to the going interest rate
(YTM=9%)

Bond C is selling at a premium because its coupon rate (11%) is greater that the going interest
rate (YTM=9%)

Work parts b through e with a spreadsheet. You can also work these parts with a calculator to
check your spreadsheet answers if you aren't confident of your spreadsheet solution. You must
then go on to work part g with the spreadsheet

b. Calculate the price of each of the three bonds.


Nicole Kyle A. Labbao Security Analysis
4FM4, Sat 7:00-10:00 Prof. Cesar Cruel

Answer:

Basic Input Data: Bond A Bond B Bond C

Years to Maturity: 12 12 12

Periods per year: 1 1 1

Periods to maturity: 12 12 12

Coupon rate: 7% 9% 11%

Par value: $1,000 $1,000 $1,000

Periodic payment: $70 $90 $110

Yield to maturity 9% 9% 9%
$856.79 $1,000.00 $1,143.21
PROBLEM
9-3 CONSTANT GROWTH VALUATION
Harrison Clothiers' stock currently sells for $20 a share. It just paid a dividend of $1.00 a share.
(That is, Do= $1.00). That dividend is expected to grow at a constant rate of 6% a year. What
stock price is expected 1 year from now? What is the required rate of return?

Answer:

9-8 PREFERRED STOCK VALUATION


Nicole Kyle A. Labbao Security Analysis
4FM4, Sat 7:00-10:00 Prof. Cesar Cruel

Ezzell Corporation issued perpetual preferred stock with a 10% annual dividend. The stock
currently yields 8%, and its par value is $100.

a. What is the stock's value?

Answer:

Preferred Stock Value = Annual Dividend / Yield = 10%*100/8% = $125

b. Suppose interest rates rise and pull the preferred stock's yield up to 12%. What is its new
market value?

Answer:

Preferred Stock Value = Annual Dividend / Yield = 10%*100/12% = $83.33

You might also like