A bond has a yield to maturity of 12.11 percent, an 11.5 percentannual coupon, a

Question

A bond has a yield to maturity of 12.11 percent, an 11.5 percentannual coupon, a $1,000 face value, and a maturity date 8 yearsfrom today. What is the current yield?

a. 9.47 percent
b. 10.15 percent
c. 10.73 percent
d. 11.50 percent
e. 11.86 percent

American Express paid an annual dividend of $1.85 per sharelast year. Management just announced that future dividends willincrease by 4 percent annually. What is the amount of the expecteddividend in year 4?

a. $1.93
b. $1.98
c. $2.04
d. $2.10
e. $2.16

Exxon Mobil bonds have a face value of $1,000. Thebonds carry a 7 percent coupon, pay interest semiannually, andmature in 11 years. What is the current price of these bonds if theyield to maturity is 8.79 percent?

a. $705.14
b. $875.41
c. $923.24
d. $1,223.43
e. $1,362.63

Explanation / Answer

Dividend (D0)   = $1.85

Dividend growth rate (g) = 4% annually

Calculating Dividend Payments for 4years:

Dividend payment in 1st year = $1.85 * 1.04          =          $1.924

Dividend payment in 2nd year = $1.924 *1.04          =          $2

Dividend payment in 3rd year = $2 *1.04               =          $2.08

Dividend payment in 4th year = $2.08 *1.04                      =          $2.16

11 years

$1,000

Calculating Current Market Value of the Bond: Yield to Maturity (r ) 12.11% Annual Coupon Payment [$1,000 * 11.5%] $115 Number of years to Maturity (t) 8 years Current Bond Value = C * [1-1/(1+r)t] / r +F/(1+r)t Current Bond Value = $115 * [1-1/(1+0.1211)t] / 0.1211 + $1,000 /(1+0.1211)8 Current Bond Value = $115 * [1-1/(1.1211)8] / 0.1211 + $1,000 /(1.1211)8 Current Bond Value = $115 * 4.9486 + $400.72 Current Bond Value = $569.09 + $400.72 Current Market value of the Bond =$969.81 Bond's Current Yield = Annual Coupon / Current MarketValue of the Bond Current Yield = $115 / $969.81 = 0.11857 (or)11.86% Current Yield = 11.86%

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