Bond & Stocks Valuation

Bond & Stocks Valuation

Chapter 7 Question no 1

Part A

Bond Valuation

Microsoft

Particulars

Amount in $

Face value

1000

Coupon Rate:

5.25%

Years to Maturity:

30

Required Return:

6.00%

Bond Price

896.22

 

 

Bond Valuation

Ford

Particulars

Amount in $

Face value

1000

Coupon Rate:

7.125%

Years to Maturity:

25

Required Return:

15.00%

Bond Price

489.12

 

 

Bond Valuation

Xerox

Particulars

Amount in $

Face value

1000

Coupon Rate:

8.00%

Years to Maturity:

16

Required Return:

10.00%

Bond Price

841.97

 

Part B

Calculate Yield to Maturity

Microsoft

Particulars

Amount in $

Interest rate

5.25%

Par value

1,000.00

Purchase price

1,009.00

Capital gain

-9.00

Number of years to maturity

30

Annualized capital gain

-0.30

Annual interest

52.50

Total annualized return

52.20

Results

Yield "A"

5.17%

Yield "B"

5.22%

Yield to maturity

5.20%

 

 

Calculate Yield to Maturity

Ford

Particulars

Amount in $

Interest rate

7.1250%

Par value

1,000.00

Purchase price

610.00

Capital gain

390.00

Number of years to maturity

25

Annualized capital gain

15.60

Annual interest

71.25

Total annualized return

86.85

Results

Yield "A"

14.24%

Yield "B"

8.82%

Yield to maturity

11.53%

 

 

Calculate Yield to Maturity

Xerox

Particulars

Amount in $

Interest rate

8.0000%

Par value

1,000.00

Purchase price

805.00

Capital gain

195.00

Number of years to maturity

16

Annualized capital gain

12.19

Annual interest

80.00

Total annualized return

92.19

Results

Yield "A"

11.45%

Yield "B"

9.33%

Yield to maturity

10.39%



Part C

Bond Valuation

Required Return Increased by 2%

Microsoft

Particulars

Amount in $

Face value

1000

Coupon Rate:

5.25%

Years to Maturity:

30

Required Return:

8.00%

Bond Price

688.92

 

 

Bond Valuation

Required Return Increased by 2%

Ford

Particulars

Amount in $

Face value

1000

Coupon Rate:

7.125%

Years to Maturity:

25

Required Return:

17.00%

Bond Price

428.25

 

 

Bond Valuation

Required Return Increased by 2%

Xerox

Particulars

Amount in $

Face value

1000

Coupon Rate:

8.00%

Years to Maturity:

16

Required Return:

12.00%

Bond Price

718.32

 

 

Part C

 

 

 

Bond Valuation

Required Return Decreased by 2%

Microsoft

Particulars

Amount in $

Face value

1000

Coupon Rate:

5.25%

Years to Maturity:

30

Required Return:

4.00%

Bond Price

1217.26

 

 

Bond Valuation

Required Return Decreased by 2%

Ford

Particulars

Amount in $

Face value

1000

Coupon Rate:

7.125%

Years to Maturity:

25

Required Return:

13.00%

Bond Price

567.47

 

 

Bond Valuation

Required Return Decreased by 2%

Xerox

Particulars

Amount in $

Face value

1000

Coupon Rate:

8.00%

Years to Maturity:

14

Required Return:

8.00%

Bond Price

1000

The analysis showed that the prices of each bond will witness decline when the interest rate increases in market. The primary reason behind this fact is that the new bonds will offer more interest rate so the previous bond will lose their value. On the other hand, if the interest rate in market decline then the previous bonds will witness increase in their valuation (Bakshi et.al, 2005).



Part D

The analysis showed that the ford's bonds offer highest return as compared to other two bonds (Microsoft and Xerox). The Ford and Xerox are classified as premium bonds because they are offering capital gain of $ 390 and $ 195, respectively. However, Microsoft is selling at lower price as compared to its par value so it is classified as discount bond (Acharya et.al, 2002).

Part E

According to analysis, Ford and Xerox are expected to offer healthy return of 11.53 percent and 10.39 percent, respectively. On the other hand, the Microsoft bonds are expected to provide lower return. In the light of aforementioned points, it is highly recommended to buy bonds of Ford and Xerox.

Chapter 8

Part A

Bond

Par

$1,000.00

IR

4.38%

Maturity

24

Price

$1,314.00

Required Rate of Return

60.00

Net price

$1,277.05

 

 

Preferred Stock

Par

$50.00

Dividend

$2.50

Current Price

$25.50

Required Rate of Return

7.00%

Net price

$35.71

 

 

Common Stock

Price

$36.75

Dividend

$1.32

Latest EPS

$3.06

EPS Growth Rate

11.20%

EPS Payout Ratio

43.14%

Required Rate of Return

15.00%

Net price

$38.59

Part B

According to the analysis, the investment of $ 10,000 must be invested in the common stock of Emersion Electric Company because it has lowest risk as compared to other investments options. The amount of risk is crucially important for investors because most of the investors prefer to avoid risk. The analysis also showed that the investment option “Common Stock” also provides highest net present value as compare to other two investment options which are investing in bond and preferred stock. For an optimum investing decision, there has to be a trade-off between risk and return because ...