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    Bond Prices and Valuation problems and

    P1       Bond prices and yields

    Assume that the Financial Management Corporation’s $1,000-par-value bond has a 5.700% coupon, matured on May 15, 2017, had a current price quote of 97.708, and had a yield to maturity (YTM) of 6.034%.

    Given this information, answer the following questions:

    a.    What was the dollar price of the bond?

    b.    What is the bond’s current yield?

    c.    Is the bond selling at par, at a discount, or at a premium? Why?

    d.    Compare the bond’s current yield calculated in part b to it’s YTM and explain why they differ.

    P2       Basic bond valuation

    Complex Systems has an outstanding issue of $1,000-par-value bonds with a 12%

    coupon interest rate. The issue pays interest annually and has 16 years remaining to its maturity date.

    a.    If bonds of similar risk are currently earning a 10% rate of return, how much should Complex Systems bond sell for today?

    b.    Describe the two possible reasons why the rate on similar-risk bonds is  below the coupon interest rate on the Complex Systems bond.

    c.    If the required return were at 12% instead of 10%, what would the current value of Complex Systems’ bonds be? Contrast this finding with your findings in part a and discuss.

    P3       Common stock value – Constant Growth

    McCracken Roofing, Inc., common stock paid a dividend of $1.20 per share last year. The company expects earnings and dividends to grow at a rate of 5% per year for the foreseeable future.

    a.    What required rate of return for this stock would result in a price per share of $28?

    b.    If McCracken expects both earnings and dividends to grow at an annual rate of 10%, what required rate of return would result in a price per share of $28?