## 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?