19 Aug 2022

48

How to Value a Bond

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Academic level: College

Paper type: Coursework

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A bond has a coupon rate of 7% and has 5 years until maturity. If the current yield to maturity is 5%, what is the price of the bond? What is the amount of the annual interest payment paid to the bondholder? 

Solution 

Given, 

For bonds, the face value is customarily $1,000. 

Required? 

Current price of bond and the amount of interest payment paid to the bondholder 

Solution 

An investor buys a 10-year, 7% coupon bond for $990, holds it for 1 year, and then sells the bond for $980. What was the investor's rate of return?  

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Given, 

Required? 

The investor’s rate o return? 

What is the price of a zero coupon bond with a 20 year maturity and a yield to maturity of 6% and a par value of $100,000? 

Given, 

Chapter 7 Valuing Stock 

Arts & Crafts will pay a dividend of $3 per share in 1 year. The stock sells for $50 per share, and provides a return of 12%. What is the growth rate of the company’s dividends?   

Solution 

Given, 

Required? 

Growth rate of the company 

Making g the subject of the formula, the formula becomes, 

What should be the current price of a stock if the expected dividend is $3, the stock has a required return of 8%, and a constant dividend growth rate of 4%?  

Solution 

Given, 

Required? 

Current price of stock 

Since the growth of the dividend is constant, 

Chapter 8 - Net Present Value 

What is the NPV for a 3 year project with an initial investment of $100,000, an opportunity cost of capital of 6% and the following cash flows? 

Yr. 1 - $35,000 

Yr. 2 - $40,000 

Yr. 3 - $45,000 

Initial Investment 

$100,000 

 
Opportunity Cost of Capital 

6% 

 
     
Year  Cash flows  Present Value (PV) 

$35,000 

$33,019 

$40,000 

$35,600 

$45,000 

$37,783 

     
Total PV   

$106,402 

Net Present Value (NPV)   

$6,402 

Chapter 9 – Operating Cash Flow 

A new project is expected to generate annual sales of $74 million, annual expenses of $42 million, and an annual depreciation expense of $10 million. The firm's tax rate is 35%. Calculate the OCF (Operating Cash flow) for the year by using any of the three methods discussed in the chapter 9. 

Solution 

Income Statement  Sales 

$74 

  Annual Expenses 

$42 

  Annual Depreciation Expense 

$10 

  Tax Rate 

35% 

  EBIT 

$22 

  Tax 

$7.7 

  Profit or Net Income 

$14.30 

Method 1  Dollars in minus Dollars Out   
  Operating Cash Flow  Revenue-Cash Expenses-Taxes 
  Operating Cash Flow 

$24.3 

     
Method 2  Adjusted Accounting Profits   
  Operating Cash Flow  After Tax Profit+Depreciation 
  Operating Cash Flow 

$24.30 

     
Method 3  Depreciation Tax Shield Approach   
  Operating Cash Flow  (Sales -Expenses)(1-t)+(Depreciation(t) 
  Operating Cash Flow 

$24.30 

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Reference

StudyBounty. (2023, September 14). How to Value a Bond.
https://studybounty.com/how-to-value-a-bond-coursework

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