1. Joshua Corp. has 10% coupon bonds on the market with 8 years to maturity. The
ID: 1175548 • Letter: 1
Question
1. Joshua Corp. has 10% coupon bonds on the market with 8 years to maturity. The bonds make semi-annual payments and currently sell for 107 percent of par. What is the Yield-to-Maturity (YTM) and current yield on Joshua’s bonds?
2. Universal Exports has 11 percent coupon bonds making annual payments with an YTM of 8 percent. The current yield on these bonds is 10 percent. How many years do these bonds have until they mature?
3. Corn Inc. has an odd dividend policy. The company has just paid a dividend of $6 per share and has announced that it will increase the dividend by $2 per share for each of the next four years, and then never pay another dividend. If the required return is 11 percent, how much will you pay for a share today?
Explanation / Answer
1)
Assuming the par value of bond is 100
Price of bond = 107% of 100 = 107
Coupon payment = 0.1 * 100 = 10 / 2 = 5 ( since it is a semi annual bond, we divide by 2)
Number of periods = 8 * 2 = 16
Yield to maturity using a a financial calculator = 8.7644%
(Keys to use in a financial calculator: 2nd I/Y 2, FV 1000, PV -107, N 16, PMT 5, CPT I/Y)
Current yield = Annual dividend / current share price
Current yield = 10 / 107
Current yield = 0.09346 or 9.346%
2)
Assuming the face value to be 100
Annual coupon = 0.11 * 100 = 11
Current yield = Annual dividend / price of bond
0.1 = 11 / price of bond
price of bond = 110
Number of years using a finanical calculator = 4.03 years
Keys to use in a financial calculator: PV -110, FV 100, PMT 11, I/Y 8, CPT N
3)
Present value of year 1 dividend = ( 6 + 2) / ( 1 + 0.11) = 7.201
present value of year 2 dividend = 10 / ( 1 + 0.11)2 = 8.116
Present value of year 3 dividend = 12 / ( 1 + 0.11)3 = 8.774
Present value of year 4 dividend = 14 / ( 1 + 0.11)4 = 9.222
Value of share today = 9.222 + 8.774 + 8.116 + 7.201
Value of share today = $33.31
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