1. Spotify bonds currently sell for $1,250. They pay a $90 annual coupon, have a
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Question
1. Spotify bonds currently sell for $1,250. They pay a $90 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM; it is possible to get a negative answer.)
2.62%
2.88%
3.17%
3.48%
2. Which of the following statements is CORRECT?
a. The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.
b. If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock’s dividend yield is also 5%.
c. The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.
d. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
3. If a preferred stock from E & E pays $2.50 in annual dividends, and the required return on the preferred stock is 5.8 percent, what's the value of the stock?
a. $0.15
b. $0.43
c. $14.50
d. $43.10
Explanation / Answer
1)YIELd to maturity =[Interest +(Face value -price)/years] /[(Face value +price)/2]
= [90+ (1000- 1250)/25] /[(1000+1250)/2]
= [90 + (-250/25] /[2250/2]
= [90 - 10] / 1125
= 80 /1125 = 7.11%
Yield to call = [90+ (1000- 1050)/5]/[(1000+1050)/2]
= [90 - (50/5) ] /[2050/2]
= [90 -10] / 1025
= 80/1025 = 7.80%
differnce = 7.80 - 7.11 = .69%
correct option is "" 1 " - .69% [approx .62%]
2)correct option is "C" - The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.
This formula can be used whether growth rate is negative or positive
3)Price= 2.5 / .058 = $ 43.10
correct option is "D"
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