Bond P is a premium bond with a coupon rate of 8.2%. Bond D is a discount bond with a coupon rate of 5.9%.
1. Bond P is a premium bond with a coupon rate of 8.2%. Bond D is a discount bond with a coupon rate of 5.9%. Both bonds make annual payments and have a YTM of 7%, a par value of $1000, and five years to maturity.
What is the current yield for Bond P and Bond D?
If interest rates remain unchained, what is the expected capital gains yield over the next year for Bond P and Bond D?
Explain your answer and the interrelationships among the various types of yields.
2. Suppose you buy an annual coupon bond with a coupon rate of 6% for $915.
The bond has 10 years to maturity and a par value of $1000.
What rate of return do you expect to ern on your investment?
Two years from now the YTM on your bond has declined by one percentage point, and you decide to sell.
What is the holding period yield on your investment?
Compare this yield to the YTM when you first bought the bond.
Why are they different?
3. Consider four different stocks, all of which have a required return of 19% and a most recent dividend of $2.40 per share. Stocks W, X, and Y are expected to maintain a constant growth rates in dividends for the foreseeable future of 8%, 0%, and -5% Per year respectively. Stock Z is a growth stock that will increase its dividend by 20% for the next two years and then maintain a constant 12% growth rate thereafter.
What is the dividend yield for each of these four stocks?
What is the expected capital gains yield?
Discuss the relationship among the various returns that you find for each of these stocks.
4. Suppose a company currently pays an annual dividend of $2.80 on its common stock in a single annual installment, and management plans on raising this dividend by 6% per year indefinitely. If the required return on is 12%, what is the current share price? Now suppose the company actually pays its annual dividend in equal quarterly installments: thus, the company has just paid a dividend of $.70 per share, as it has for the previous three quarters.
What is your value for the current share price now?
(Hint: Find the equivalent annual end-of-year dividend for each year.)
Do you think this model for stock valuation is appropriate?
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