BOND PROBLEM SOLUTIONS

1. Six years ago, The Corzine Company sold a 20-year bond issue with a 14 perent annual
oupon rate and a ! perent all premium. Today, Corzine alled the bonds. The bonds
originally were sold at their "ae #alue o" $1,000. Compute the realized rate o" return "or
in#estors who purhased the bonds when they were issued and who surrender them today in
exhange "or the all prie.
PV = 1000; N = 6; PMT = 140; FV = 1090; CPT I/Y
I/Y = 15.02%
2. %ou &ust purhased a bond whih matures in ' years. The bond has a "ae #alue o" $1,000,
and has an ( perent annual oupon. The bond has a urrent yield o" (.21 perent. )hat is
the bond*s yield to maturity+
CURRENT YIELD = ANNUAL COUPON PV
0.021 = 0 PV
PV = 0 0.021 = 9!4.42
N = 5; PMT = 0; FV=1000; PV = 9!4.42 CPT I/Y
I/Y = .65%
,. The -ass Company*s bonds ha#e 4 years remaining to maturity. .nterest is paid annually/ the
bonds ha#e a $1,000 par #alue/ and the oupon interest rate is ! perent. )hat is the yield to
maturity at a urrent mar0et prie o" $(2!+ )ould you pay $(2! "or one o" these bonds i"
you thought that the appropriate rate o" return was 12 perent+
PV = 29; N = 4; FV = 1000; PMT =90; CPT I/Y
I/Y = 14.99%
YES" IF YOU T#OU$#T T#E APPROPRIATE RATE %AS 12%" YOUR PV
%OULD ACTUALLY BE #I$#ER MEANIN$ YOU %OULD BE %ILLIN$ TO PAY
MORE T#AN &29.
4. Sitel .n. has a bond whih matures in 1 years and urrently sells "or $1,020. The bond has a
"ae #alue o" $1,000 and a yield to maturity o" 10.'((, perent. The bond pays oupons
semiannually. )hat is the bond*s urrent yield+
CURRENT YIELD = ANNUAL COUPON PV
FV = 1000; PV = 1020; I/Y = 10.55' 2 = 5.2942; N = 14; CPT PMT
PMT = &55
ANNUAL COUPON = 55(2 =110
CURRENT YIELD = 110 1020 = 10.!%
'. 2oo0 up the pries o" 3T4T bonds in the Wall Street Journal. ." 3T4T were to sell a new
issue o" $1,000 par #alue long-term bonds, approximately what oupon interest rate would it
ha#e to set on the bonds i" it wanted to bring them out at par+
STOC) PROBLEM SOLUTIONS
1. 3 sto0 is trading at $(0 per share. The sto0 is expeted to ha#e a year-end di#idend o" $4
per share whih is expeted to grow at some onstant rate g throughout time. The sto0*s
re5uired rate o" return is 14 perent. ." you are an analyst who belie#es in e""iient mar0ets,
what would be your "oreast o" g+
P0 = &0; *1 =&4; + = 14%
+ = ,*1 P0- . /
/ = + 0 ,*1 P0- = 0.14 0 ,4 0- = 0.14 0 0.05 = 0.09 = 9%
2. )hat will be the nominal rate o" return on a pre"erred sto0 with a $100 par #alue, a stated
di#idend o" ( perent o" par, and a urrent mar0et prie o" $140+
P = D +
D = % 1 100 = &
+ = D P = 140 = 0.05!1 = 5.!1%
,. 6iroteh Corporation is expanding rapidly, and it urrently needs to retain all o" its
earnings, hene it does not pay any di#idends. 7owe#er, in#estors expet 6iroteh to begin
paying di#idends, with the "irst di#idend o" $1.00 oming , years "rom today. The di#idend
should grow rapidly 8 at a rate o" '0 perent per year 8 during %ears 4 and '. 3"ter %ear ',
the ompany should grow at a onstant rate o" ( perent per year. ." the re5uired return on
the sto0 is 1' perent, what is the #alue o" the sto0 today+
D' = 1.00
D4 =1.00 ,1.50- = 1.50
D5 = 1.50 ,1.50- = 2.25
C234567 D6 = 2.25 ,1.0- = 2.4' 8596 62 597 :2; <2=96>=6 /;2?6@ 32*7A ,DVM- :2;
B>A5C=/ *CBC*7=*9 :;23 D7>; 6 62 C=:C=C6D.
P5 = D6 ,+0/- = 2.4' ,0.15 0 0.0- = '4.!1
U9C=/ 6@7 <>9@ :A2? ?2;+9@776E
CF0 = 0
CF1 = 0
F01 = 2
C02 = 1.00
C0' = 1.50
C04 = 2.25 . '4.!1 = '6.96
NPV
I = 15
NPV = &19.9

4. %ou buy a share o" The 9u Corporation sto0 "or $21.40. %ou expet it to pay di#idends o"
$1.01, $1.144!, and $1.2240 in %ears 1, 2, and ,, respeti#ely, and you expet to sell it at a
prie o" $2:.22 at the end o" , years. Calulate the growth rate in di#idends. Calulate the
expeted di#idend yield. )hat is this sto0*s expeted total rate o" return+
P0 = 21.40
D1 = 1.0!
D2 =1.1449
D' = 1.2240
P' = 26.22
$;2?6@ ;>67 C= *CBC*7=*9E PV= 1.0!; FV = 1.2240; N = 2; CPT I/Y; I/Y = 6.9544% L76F9
;25=* 62 !%.
DCBC*7=* DC7A* = ,*1 P0- = 1.0! 21.40 = 0.05
T26>A ;765;= = !% . 5% = 12%