Bonds

ahoffm05

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Apr 30, 2010
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Trying to answer this practice question but i am really stuck

a. You have decided to invest in a company, Joint Co., which has developed a new coupling joint that you believe has great potential. The company is due to pay it’s first dividend of $0.30 in one year’s time. Your research has shown that after the first dividend payment you expect the dividend to grow by 8% for the next two years, 12% for the following two years, before settling into its long term growth rate of 6%.
How much would you be willing to pay for a share in the company today given that you require a return of 9.5%pa?
b. To fund its research Joint Co. initially issued 10 year bonds two years ago with a face value of $1,000 and a coupon rate of 7%, paid semi-annually.
If the yield on these bonds is currently 9%, what is the price of a bond today?
It is expected that the yield on these bonds will fall to 6.5% in four year’s time. What will their price be at that time?
Explain why the yield on these bonds may fall and the effect this fall will have on the price?
 
ahoffm05 said:
Trying to answer this practice question but i am really stuck

a. You have decided to invest in a company, Joint Co., which has developed a new coupling joint that you believe has great potential. The company is due to pay it’s first dividend of $0.30 in one year’s time. Your research has shown that after the first dividend payment you expect the dividend to grow by 8% for the next two years, 12% for the following two years, before settling into its long term growth rate of 6%.
How much would you be willing to pay for a share in the company today given that you require a return of 9.5%pa?
b. To fund its research Joint Co. initially issued 10 year bonds two years ago with a face value of $1,000 and a coupon rate of 7%, paid semi-annually.
If the yield on these bonds is currently 9%, what is the price of a bond today?
It is expected that the yield on these bonds will fall to 6.5% in four year’s time. What will their price be at that time?
Explain why the yield on these bonds may fall and the effect this fall will have on the price?

Please show us your work, indicating exactly where you are stuck - so that we may know where to begin to help you.
 
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