Round 81 Homework 4a Bond Current Yield 1000 Par Value

Round 81 Homework 4a Bond Current Yielda 1000 Par Value Bond Wit

Identify the core assignment task: calculating various bond metrics such as current yield, bond valuation, yield to maturity (YTM), and bond pricing, as well as analyzing preferred and common stock values, expected returns, and portfolio calculations. Focus on performing financial calculations based on given inputs and using appropriate financial formulas or tools like Excel or a financial calculator.

Paper For Above instruction

Understanding and analyzing fixed-income securities and equity investments requires a thorough comprehension of key financial metrics such as current yield, bond valuation, yield to maturity, and stock valuation. These calculations serve as essential tools for investors and financial analysts in making informed investment decisions.

Bond Current Yield Calculation

For a bond with a par value of $1,000, a coupon rate of 18.76%, and a current price of $1,067, the current yield measures the annual income relative to the market price. The formula for current yield is:

Current Yield = (Coupon Payment / Current Market Price) * 100

The annual coupon payment is:

Coupon Payment = Par Value Coupon Rate = $1,000 18.76% = $187.60

Therefore, the current yield is:

Current Yield = ($187.60 / $1,067) * 100 ≈ 17.58%

Thus, the bond’s current yield is approximately 17.58%.

Bond Valuation with Semiannual Payments

Using the given data for Flower Valley Company bonds—9.37% coupon rate, paid semiannually, a $1,000 par value, 21 years to maturity, and a required rate of 9.27%—the bond valuation involves discounting the future cash flows (coupons and face value) at the semiannual yield rate.

First, determine the semiannual coupon payment:

Coupon Payment = ($1,000 * 9.37%) / 2 = $46.85

Number of periods:

Total periods = 21 years * 2 = 42

Periodic yield:

Market rate per period = 9.27% / 2 ≈ 4.635%

Using the present value formula for bonds, the valuation is:

Bond Value = (Coupon Payment * [1 - (1 + r)^-n] / r) + (Face Value / (1 + r)^n)

Substituting the known values:

Bond Value ≈ ($46.85 * [1 - (1 + 0.04635)^-42] / 0.04635) + ($1,000 / (1 + 0.04635)^42)

Calculating this yields an approximate bond value of $1,026.45.

Yield to Maturity (YTM) Calculation

Given Blue Crab, Inc.’s bonds—29-year maturity, 8.02% annual coupon rate, $1,000 face value, and a selling price of $1,191—the YTM is found by solving the bond pricing formula for the yield where the present value of future cash flows equals the current price.

Using a financial calculator or Excel’s RATE function, the YTM can be estimated. The approximate YTM calculation involves iterative solving, but using Excel’s RATE function:

≈ 6.24%

This means the bond's yield to maturity is approximately 6.24% annually.

Zero-Coupon Bond Pricing

Mini Max Inc.’s zero-coupon bonds with a 30-year maturity, $1,000 par, and semiannual YTM of 12.27% are priced by discounting the face value at this rate for 30 years, compounded semiannually:

Price = Face Value / (1 + YTM/2)^(2 * Years)

Substituting values:

Price = $1,000 / (1 + 0.1227/2)^(2*27) ≈ $86.64

Therefore, the current price of the bond is approximately $86.64.

Bond Quotes and Coupon Payment Calculation

For Fresh Bakery Inc., with a par value of $5,000, an AA rating, and a bond quote of approximately 96, the price in dollars is:

Price = 96% of $5,000 = $4,800

To find the annual coupon interest payments, given the coupon rate is not specified, but assuming a typical rate based on market info, if, for example, the coupon rate is 4%, the annual coupon payment is:

Coupon Payment = $5,000 * 4% = $200

Valuation and Expected Rate of Return on Preferred Stock

Given UPS preferred stock pays $6 annually and the required rate of return is 7.37%, the maximum price willing to be paid is obtained via the dividend discount model:

Price = Dividend / Required Rate = $6 / 0.0737 ≈ $81.37

Valuation of Common Stock and Expected Return

For Alfa Growth Inc., expecting to sell at $64.09 in one year with a dividend of $3.90 and requiring a 9.02% return, the current price (P0) is computed from:

P0 = (Dividend + Price at sale) / (1 + required return) = ($3.90 + $64.09) / 1.0902 ≈ $63.86

Expected Return of a Portfolio with Multiple Securities

The overall expected return of a portfolio is the weighted average of individual securities’ returns:

Expected Return = (wA rA) + (wB rB) + (wC * rC)

Given data: 47% in Stock A (-4.3%), 20% in Stock B (4.4%), and 33% in Stock C (5.4%):

Expected Return = 0.47 (-4.3%) + 0.20 4.4% + 0.33 5.4% ≈ 0.47 -0.043 + 0.20 0.044 + 0.33 0.054 ≈ -0.0202 + 0.0088 + 0.0178 ≈ 0.0064 or 0.64%

Conclusion

In performing these calculations, investors can evaluate the attractiveness of bonds and stocks through metrics such as current yield, bond valuation, yield to maturity, and expected returns. Accurate financial modeling and careful consideration of market conditions are crucial in making sound investment decisions, and tools like Excel or financial calculators facilitate precise computation of these variables. Understanding these relationships enhances portfolio management and risk assessment strategies in the financial markets.

References

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  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd ed.). Wiley Finance.
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