Here is data for an issuer who has not issued preferred stock: bond’s par value

Question

Here is data for an issuer who has not issued preferred stock:

            bond’s par value          $1,000

            bond’s market price    $1,125

            bond’ coupon                      5% (paid semi-annually)

            bonds maturity date    8 years from today

            stock’s par value         $1.00

            stock’s market value   $10.00

           dividend expected 1 year from now               $0.40

           dividend growth rate                                      3%

What is the dividend yield on the stock on a forward-looking, or prospective, basis?

5%

What is the current yield on the issuer’s bonds?

Explanation / Answer

1)Dividend yield=Dividedn expected next year/market price of stock
=0/4/10=4%
2)Current yileld of bond= coupon price/price of the bond
coupon price= bond face value* coupon rate
=1000*5%=50
=50/1125=4.44%

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