TUNIS BUSINESS SCHOOL BCOR 260: Principles of Finance - Tutorial

UNIVERSITY OF TUNIS

HOMEWORK 3
Instructions:
Please send your answer in 1 single document in PDF format. Clearly write your full name,
Group, and ID number. Deadline is set for Sunday 8 May, at midnight. Any late submission will
automatically be rejected. Good luck!

Exercise 1:

A firm issued a bond with the following characteristics:

Face Value: $1,000, Semi-annual coupon payments, Coupon rate c: 8%, Market interest
rate rd : 10%
Issue date: 01/01/2015, Maturity date: 01/01/2025

1. Was the bond issued at a discount or at premium? Why?

2. The bondholder decided to sell the bond at 15/09/2020. Find the present value of the
bond at 01/07/2020.
3. Find the Full price at 15/09/2020.
4. Find the Accrued Interest from 01/07/2020 to 15/09/2020.
5. Find the Clean price.

Exercise 2:
Suppose a firm is planning to distribute the following set of dividends in the next 4 years:
𝐷1 = $1; 𝐷2 = $1.3; 𝐷3 = $1.7; 𝐷4 = $2. The dividends will then grow at a constant sustainable
rate.

The required rate of return is 10%, the return on equity is 12%, and the dividend payout ratio
is 0.3.

1. Determine the constant sustainable growth rate in effect after the 4 th year.
2. Determine the estimated stock value at t = 0.
3. Determine the estimated stock values at t=1, 2 and 3.
4. Determine the Dividend yield and Capital gain yield at years 2 and 4.
Exercise 3:

Suppose a semi-annual bond offered at $1,075 with a YTM of 8%, and time left till maturity of
15 years.

1. Intuitively, compare the bond’s annual coupon rate to its YTM. Why?
2. Calculate the bond’s annual coupon rate.
3. Determine the bond’s Current yield 10 years prior to maturity.
4. Determine the bond’s Capital Gain Yield 10 years prior to maturity.

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 TUNIS BUSINESS SCHOOL BCOR 260: Principles of Finance - Tutorial
UNIVERSITY OF TUNIS

Exercise 4:
Suppose a 15-year Callable bond, 8% semi-annual coupon bond, with a remaining maturity of
10 years, priced at $925. The bond can be called backed by the issuer, based on schedule: 7 th
year, 10th year, and 12th year, since inception (since creation of the bond). The call price is set
at $1,025. The interest rates in the market are expected to rise in the near future.
1. Determine the YTM of the Callable bond.
2. Determine the YTC of the Callable bond, if we suppose the bond can be called 7 years
after its inception (issue).
3. Which rate the investor should expect to earn based on the market interest rate
forecasting?