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J&M motor company has a bond with a coupon rate of 8 percent, face value of $1000, 7 years to maturity, semiannual interest payments, and a YTM of 7 percent (compounded semiannually)
J&M motor company has a bond with a coupon rate of 8 percent, face value of $1000, 7 years to maturity, semiannual interest payments, and a YTM of 7 percent (compounded semiannually).
a) What is the bond price?
b) What is the current yield on bond?
c) If the company wants to issue 5.4 percent preferred stock with a stated liquidating value of $100 a share. The company has determined that stocks with similar characteristics provide a return of 8.2 percent. What should the offer price be?
Expert Solution
a) We can calculate the bond price by using the following formula in excel:-
=-pv(rate,nper,pmt,fv)
Here,
PV = Bond price
Rate = 7%/2 = 3.5% (semiannual)
Nper = 7*2 = 14 periods (semiannual)
Pmt = Coupon payment = $1,000*8%/2 = $40
FV = $1,000
Substituting the values in formula:
= -pv(3.5%,14,40,1000)
= $1,054.60
b) Computation of the current yield:-
Current yield = Annual coupon payments / Bond price
= $1,000*8% / $1,054.60
= 7.59%
c) Computation of the offer price:-
Offer price = Preferred dividend / Return
= $100 * 5.4% / 8.2%
= $65.85
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