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1. supposing that a company sold an issue of bonds with a 10 year maturity $1000 par value, 15 percent coupon rate and semi-annual interest payments. two years after the bonds were issued the going rate of interest on bonds such as these fell to 9 percent.
required:
a. what would be the value of this bond then.
b. how do bonds behave in relation to the fall and rise of market interest rate for bonds?
c. what would be the value of the bond two years after they were issued?2. AT is experiencing a period of rapid growth. the earnings and dividends are expected to grow at a rate of 18% during the next two years at 15% in the third year and then at constant rate of 6% thereafter. the last dividend payment was $2 and the required rate of return on the stock is 10%.
> calculate the price of the stock todayWith regard to your first question, the market value of bonds is the present value of future receipts discounted at the investors required rate of return.
So….if the going rate falls to 9% the market value will change (and because you will be discounting at a lower rate, the market value will rise).With regard to your second question, you need to discount the first three years dividends separately (because there is not constant growth). Once it changes to content growth, then you can use the dividend growth formula on the formula sheet.
The market value will be the total of the present values.
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