Question
Marconi Inc. is a large corporation that produces specialized high-end automobile parts. You have obtained the...
Answers
The solution to the part a)
The price of a bond is the sum total of present values of all coupon payments and present value of maturity value.
Further, the cash flows value and the discount rate should always be consistent i.e. if cash flows are received semiannually, time interval and required rate of return is also compounded semiannually,
Thus,
Coupon rate will be 6%/2 = 3%
YTM will be 4.50% / 2 = 2.25%
And; years to maturity will be 2.5years * 2 = 5 years
Face Value of Bond A $ 1000
Bond A price as on Nov 01, 2019 = PV of all coupon payments + PV of maturity value
PV of all coupon payments = (coupon payments) * cumulative discount factor for 5 years at the YTM
= (Face Value * Coupon rate ) * ( (1-1/(1+YTM)N) / YTM )
= $ 30.00 * ((1- 1/(1+2.25%)5)/2.25%)
= $ 30.00 * 4.6795
= $ 140.38
PV of maturity value = Face value * discount factor for 5th year at the YTM
= $ 1000 * (1/(1+YTM)N)
= $ 1000 * (1/(1+2.25%)5)
= $ 1000 * 0.8947
= $ 894.71
Bond A price as on Nov 01, 2019= PV of all coupon payments + PV of maturity value
= $ 140.38 + $ 894,71 = $ 1035.09
The solution to the part b)
Holding Period Return on Nov 01, 2019 = [Coupons + (Bond Price as on Nov 01, 2019 - Quoted Price)] / Quoted Price) * 100
= [($ 1000 * 3% * 2.5 years * 2) + ( $ 1035.09 - $ 95.00 )] / $ 95.00 * 100
=[ $ 150.00 + $ 9.8957 ] * 100
= 15989%
Annualised HPR = (HPR+1)1/n - 1
= (15989%+1)1/2.5 - 1
= 6336%
The solution to the part c)
Current Yield = Annual Coupons / Current Bond Price
= $ 1000 * 6% / $ 1035.09
= 5.80%
The solution to the part d)
Since the Series B preference stock has no maturity, its dividend will be paid till perpetuity.
Hence the market price of the Preferred share series B will be the present value of the dividends at the market rate of return
Series B Preferred Share Price = [ Preference Dividend / Required Market rate of return ]
= $ 5.25 / 6%
Market price = $ 87.50