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Finance

1.) A 10?year, 6.2?percent coupon bond is selling for 102.6 percent of par. What is the bond's market yield if it makes semi?annual coupon payments? 

2.) Oriole Mechanical Ltd.'s preferred shares have a par value of $50, a dividend rate of 9.0 percent, and trade at a price of $75. Waterway Inc.'s preferred shares have a par value of $60, have a dividend rate of 5.0 percent, and trade at a price of $40.

 

Which company's preferred stock is riskier? What is each required rate of return?

 

 

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1) Computation of Bond's Market Yield using Rate Function in Excel:

=rate(nper,pmt,-pv,fv)*2

Here,

Rate = Yield to Maturity = ?

Nper = 10 years*2 = 20 Periods

PMT = $1,000*6.2%/2 = $31

PV = $1,000*102.6% = $1,026

FV = $1,000 (assumed)
Substituting the values in formula:

=rate(20,31,-1026,1000)*2

Rate or Yield to Maturity = 5.85%

 

2) Computation of Required Return on Preferred Stock:

Required return on preferred stock = Annual dividend/Current market price

Annual dividend = Dividend Rate * Par Value

For Oriole Mechanical Ltd., Annual Dividend = $50 * 9% = $4.50

Required return = $4.50/$75 = 6.00%

 

For Waterway Inc. Annual Dividend = $60 * 5% = $3

Required return = $3/$40 = 7.50%

 

Given required return for Waterway Inc. is higher, it is riskier preferred stock of the two.

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