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37. Question 32 Douglass Enterprises has a capital structure which is based on 40 percent debt, 10 percent preferred stock, and 50 percent common stock. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate having a maturity of ten years. A stock has an expected return of 15.5 percent, its beta is 1.65, and the expected return on the market is 12.6 percent. However, after the calculation, you can see that the municipal bond actually offers a higher return (9.17 percent over 9 percent). Mr. Glass, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital.… A. Aaa is the highest rating a corporate bond can get, and is considered investment grade. For example, assume a 20-year corporate bond pays a 5 percent coupon rate, has a $1,000 par value and shows a price of 104.89. The common stock has a price of $70 and an expected dividend (D1) of $5.50 per share. In other words, 7 percent is the rate that equates the net proceeds from the bond with the present value of the The Federal Reserve has also thrown in its support, buying up corporate bonds and even bond ETFs over the past couple months, in turn driving up private purchases of debt. Get updated data about global government bonds. 35. As a bond approaches maturity, its trading price converges with its par value, usually a multiple of 100 or 1,000. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The maturity value is $1,000. CC 15.1: You are analyzing a firm that has made extraordinary returns on its projects over the last 10 years, largely as a consequence of a few products that are patent protected. Want to read all 4 pages? Statement b is false. For example, assume a 20-year corporate bond pays a 5 percent coupon rate, has a $1,000 par value and shows a price of 104.89. This preview shows page 7 - 11 out of 12 pages. 41. (2) Over the past four years, the returns on the market and on J-Mart were as follows: Year Market J-Mart 2001 12.0% 14.5% 2002 17.2 22 The company's tax rate is 35 percent. The bond is currently selling at par ($1,000). A corporate bond returns 12 percent of its cost (in PV terms) in the first year, 11 percent in the second year, 10 percent in the third year and the remainder in the fourth year. What is the firm's weighted average cost of capital if the debt-equity ratio is .60? The bond can first be … (a) rises; rises 7.2 The present value of the bond’s cash flows is its current price, $911.37. Bond Price = R… DeVry University, Keller Graduate School of Management, California State University, Long Beach • FIN 360, DeVry University, Keller Graduate School of Management • FINANCE 564, Texas A&M University, Kingsville • BUS 101. (Round answer to 2 decimal places.) The arithmetic average of these returns is _____ percent … It has a face value of $20,000. If an N year security recovered the same percentage of its cost in PV terms each year the. The CAPM formula is widely used in the finance industry. A six year maturity bond has a five year duration. A corporate bond with an 11 percent semiannual coupon has a yield to maturity of 9 percent. The price investors are willing to pay for a bond can … What is the bond's duration in years? Nominal yield, or the coupon rate, is the stated interest rate of the bond. What is the For instance, for a contractor with poor credit who has a 3 percent rate on a $500,000 bond, the cost would be $15,000. This yield percentage is the percentage of par value —$5,000 for municipal bonds, and $1,000 for most other bonds — that is usually paid semiannually. Cost of capital is the minimum rate of return that a business must earn before generating value. This paper examines the relation between portfolio concentration and investment performance in corporate bond mutual funds. Also assume that the bond pays out interest once a year and thus the annual coupon payment is $1,000 X 5 percent = $50. The bond’s c. What, 41. The Moody's Seasoned Aaa Corporate Bond Yield measures the yield on corporate bonds that are rated Aaa. share each year you held the stock and then you sold the stock for $47 per share. surety bond cost calculator, Imagine that, for $100,000, an investor is willing to accept an effective interest rate of 6 percent. Therefore, a corporate bond of $1,000 in face value and 5 percent coupon rate with two years left to maturity has a market value of $1,018.86 when the market interest rate is 4 percent. 38. Bond duration is an investment concept that few average investors truly understand, yet it can have a meaningful impact on how your bond mutual fund or fixed income portfolio performs relative to the bond market as a whole. You've reached the end of your free preview. A corporate bond returns 12% of its cost (in PV terms) in the first year, 11% in the second year, 10% in the third year, and the remainder in the fourth year. A bond's price is what investors are willing to pay for an existing bond. For example, imagine you were considering a corporate bond that offers 9 percent returns. (That is, the semiannual coupon payments are $45.) Let’s calculate the price of a bond which has a par value of Rs 1000 and coupon payment is 10% and the yield is 8%. Example of a result Let’s assume that someone holds for a period of 10 years a bond with a face value of $100,000, with a coupon rate of 7% compounded semi-annually, while similar bonds on the market offer a rate of return of 6.5%. Example: You are considering buying a corporate bond. The bond can first be called four years from now. Corporate Bond Ratings Before being issued to investors, bonds are reviewed for the creditworthiness of the issuer by one or more of three U.S. rating agencies: Standard & … A corporate bond returns 12% of its cost (in PV terms) in the first year, 11% in the second, year, 10% in the third year and the remainder in the fourth year. Find information on government bonds yields, bond spreads, and interest rates. What is the bond's duration in years? What is the bond's duration in years? Course Hero is not sponsored or endorsed by any college or university. Interest rates are projected to fall 25. basis points. Tips Use a financial calculator featuring functions of present … Evaluate the change in the prices of a 10-year, 5 percent coupon bond and a 10-year, 12 percent coupon bond. We thus could have used 12.36 percent per year for 20 years when we calculated the present value of the $1,000 face amount, and the answer would have been the same. Chapter 15: Investment Returns and Corporate Strategy . It may seem like an easy choice to choose the corporate bond over a municipal bond offering 5.5 percent. A corporate bond is a loan to a company for a predetermined period. A corporate bond returns 12 percent of its cost (in PV terms) in the first year, 11 percent in the second year, 10 percent in the third year and the remainder in the fourth year. The company anticipates that its proposed investment projects will be financed with 70 percent debt and 30 percent equity. A corporate bond with 12 years to maturity has a 9 percent semiannual coupon and a face value of $1,000. You know that the patent protection will end in 2 years. b. The WACC formula is = (E/V x Re) + ((D/V x Rd) x (1-T)). The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 12.2 percent. In return, the company agrees to pay interest (typically twice per year) and then repay the face value of the bond once it matures. Share your own to A corporate bond returns 12% of its cost (in PV terms) in the first year, 11% in the second year, 10% in the third year and the remainder in the fourth year. Brook’s Window Shields Inc. is trying to calculate its cost of Brook’s Window Shields Inc. is trying to calculate its cost of capital for use in a capital budgeting decision. b. Using detailed holdings da… Graph and download economic data for ICE BofA AA US Corporate Index Effective Yield (BAMLC0A2CAAEY) from 1996-12-31 to 2021-01-07 about AA, yield, corporate… 9.21 percent c. 10 16. ytm and 6 years to maturity. Compare reviews and ratings on Financial mutual funds from Morningstar, S&P, and others to help find the best Financial mutual fund for you. A 10 year maturity coupon bond has a 6 year duration. Find information on government bonds yields, bond spreads, and interest rates. This firm's bonds are currently selling for $ A six year maturity bond has a five year duration. Of your free preview nominal yield, or lending money to … example you. X Rd ) x ( 1-T ) ) example, imagine you were considering a corporate bond returns %! A 12 percent coupon rate of return of 12 pages bonds because they typically higher. Maturity of 9 percent semiannual coupon payments are $ 45 a corporate bond returns 12 percent of its cost widely in... Bond … TREASURIES-Yields rise, curve steepens as weak jobs report points to more stimulus buying! Returns 12 % of its par value and coupon rate stated interest rate investor... 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