The company issued bonds with 14% coupon rate, semiannual coupon, $1000 par valu
ID: 2714041 • Letter: T
Question
The company issued bonds with 14% coupon rate, semiannual coupon, $1000 par value. Bonds mature in 30 years and are callable 5 years from now at $1050. Bonds are sold today at $1300, and the yield curve is upward-sloping. While calculating the yield to maturity, what type of yield will you use as a most likely scenario (yield to call or YTM)? Write a formula, insert numbers (no calculations required). If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock's dividend yield is 5%. The price of the stock is expected to decline in the future. The stock's required return must be equal to or less than 5%. The stock's price one year from now is expected to be 5% above the current price. The expected return on the stock is 5% a year.Explanation / Answer
Approximate Yield-to-Maturity Percentage
=
Annual Interest Payment + (Par Value - Bond Price)/Number of Years until Maturity/
(Par Value + Bond Price)/2
Annual interest =140
Call price =1050
Face value =1000
Years to call =5
Market price =1300
Maturity years=30
YTM= [140 +(1000-1300)/30]/(2300)/2
=130/1150=11.30%
Yield-to-Call Approximation Formula for Bonds
Annual Interest Payment + (Call Price – Market Price)/Number of Years until Call/
(Call Value + Market Price)/2
Annual interest =140
Call price =1050
Face value =1000
Years to call =5
Market price =1300
Maturity years=30
YTC=[ 140 + (1050-1300)/5]/(1050+1300)/2
=90/1175=7.65%
If investors have the YTC option , they will use YTC as the most likely scenario as it is nearer in future than the YTM .
4. If a stock's dividend is constantly growing by 5% pa, the stock price will grow by 5% from current price in one year from now.
So statement d is correct
Approximate Yield-to-Maturity Percentage
=
Annual Interest Payment + (Par Value - Bond Price)/Number of Years until Maturity/
(Par Value + Bond Price)/2