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Homework answers / question archive / 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)

Finance

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? 

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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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