What would you expect to happen to the yield to maturity

Assignment Help Finance Basics
Reference no: EM131148633

After engaging in a dialogue with your colleagues on valuation, you will now be given an opportunity to apply principles that were presented in this phase. Using a Web site that provides current stock and bond pricing and yield information, complete and analyze the tables illustrated below. Your mentor suggests using a Web site similar to this one.

To fill out the first table, you will need to select 3 bonds with maturities between 10 and 20 years with bond ratings of "A to AAA," "B to BBB" and "C to CC" (you may want to use bond screener at the Web site linked above). All of these bonds will have these values (future values) of $1,000. You will need to use a coupon rate of the bond times the face value to calculate the annual coupon payment. You should subtract the maturity date from the current year to determine the time to maturity. The Web site should provide you with the yield to maturity and the current quote for the bond. (Be sure to multiply the bond quote by 10 to get the current market value.) You will then need to indicate whether the bond is currently trading at a discount, premium, or par.

Bond

Company/
Rating

Face Value (FV)

Coupon Rate

Annual Payment (PMT)

Time-to Maturity (NPER)

Yield-to-Maturity (RATE)

Market Value (Quote)

Discount, Premium, Par

A-Rated

 

$1,000

 

 

 

 

 

 

B-Rated

 

$1,000

 

 

 

 

 

 

C-Rated

 

$1,000

 

 

 

 

 

 

  • Explain the relationship observed between ratings and yield to maturity.
  • Explain why the coupon rate and the yield to maturity determine why the bonds would trade at a discount, premium, or par.
  • Based on the material you learn in this Phase, what would you expect to happen to the yield to maturity and market value of the bonds if the time to maturity was increased or decreased by 5 years?

In this step, you have been asked to visit a credible Web site that provides detailed information on publicly traded stocks and select 1 that has at least a 5-year history of paying dividends and 2 of its closest competitors.

To fill up the first table, you will need to gather information needed to calculate the required rate of return for each of the 3 stocks. You will need to calculate the risk-free rate for this assignment. You will need the market return that was calculated in Phase 2, and the beta that you should be able to find on the Web site.

Company

5-year Risk-Free Rate of Return

Beta (β)

5-Year Return on Top 500 Stocks

Required Rate of Return (CAPM)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To complete the next table, you will need the most recent dividends paid over the past year for each stock, expected growth rate for the stocks, and the required rate of return you calculated in the previous table. You will also need to compare your results with the current value of each stock and determine whether the model suggests that they are over- or underpriced.

Company

Current Dividend

Projected Growth Rate (next year)

Required Rate of Return (CAPM)

Estimated Stock Price (Gordon Model)

Current Stock Price

Over/Under Priced

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In the third table, you will be using the price to earnings ratio (P/E) along with the average expected earnings per share provided by the Web site. You will also need to compare your results with the current value of each stock to determine whether or not the model suggests that the stocks are over- or underpriced.

Company

Estimated Earning 
(next year)

P/E Ratio

Estimated Stock Price (P/E)

Current Stock Price

Over/Under Priced

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After completing the 3 tables, explain your findings and why your calculations coincide with the principles related to bonds that were presented in the Phase. Be sure to address the following:

  • Explain the relationship observed between the required rate of return, growth rate and the dividend paid, and the estimated value of the stock using the Gordon Model.
  • Explain the value and weaknesses of the Gordon model.
  • Explain the how the price-to-earnings model is used to estimate the value of the stocks.
  • Explain which of the 2 models seemed to be the most accurate in estimating the value of the stocks.
  • Based on the material that you learn in this Phase, what would you expect to happen to the value of the stock if the growth rate, dividends, required rate of return, or the estimated earnings per share were to increase or decrease? Be sure to explain each case separately.

Note: You can find information about the top 500 stocks at this Web site.

References-

S&P 500 index chart. (2014). Retrieved from the Yahoo! Finance Web site: https://finance.yahoo.com/echarts?s=%5egspc+interactive#symbol=^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

Yahoo! Finance. (n.d.). Retrieved from https://finance.yahoo.com/

Be sure to document your paper with in-text citations, credible sources, and a list of references used in proper APA format.

Reference no: EM131148633

Questions Cloud

Conduct external research from reputable and quality sources : Write a report on how relevant legislation, codes of practice, ethical principles, and national standards affect marketing operations - Briefly describe the following statistical methods and techniques to evaluate marketing opportunities, including..
Describe the importance of rare earth elements in science : Describe the importance of rare earth elements in science and technology. Assess the most common uses of these elements, particularly as encountered in your daily life, as well as projections for future demand of these minerals resources.
Impose a time limit on entering the correct combination : Impose a time limit on entering the correct combination in that after the user enters the first symbol of the combination, he or she has five seconds to enter the entire sequence.
What is the monthly total cost equation : razier Manufacturing Company collected the following production data for the past month:- If the high-low method is used, what is the monthly total cost equation?
What would you expect to happen to the yield to maturity : Based on the material you learn in this Phase, what would you expect to happen to the yield to maturity and market value of the bonds if the time to maturity was increased or decreased by 5 years
Develop a work breakdown structure for the project : Evaluate the four projects by preparing a weighted decision matrix using the template provided. Develop at least four criteria, assign weights to each criterion, assign scores, and then calculate the weighted scores. Write a one-page paper that de..
The purpose motivating regulators to impose interest ceiling : What was the purpose motivating regulators to impose interest ceilings on bank savings accounts? What effect did this eventually have on the money markets?
Prepare a consolidation worksheet for shark and fish : Shark Company purchased 70% interest in Fish Company on July 1, 2014.- prepare a consolidation worksheet for Shark and Fish for the year ending December 31, 2014.
What business benefits were derived from adopting : Was an ERP system associated with the business-process re-engineering? What business benefits were derived from adopting "best practices"?

Reviews

Write a Review

 

Finance Basics Questions & Answers

  Statements about cost of capital estimation

statements about cost of capital estimation is most correct?

  Present your findings of the above data in a table

Present your findings of the above data in a table. Add a paragraph that summarizes your results, indicating whether investors would find the financial analysis results of Apix competitive as compared to rivals in the sector. Be sure to include bo..

  Dr oats a nutrition professor invests 80000 in a piece of

dr. oats a nutrition professor invests 80000 in a piece of land that is expected to increase in value by 14 percent per

  Frequency of accidents occurring

The data below, taken from Greenwood and Yule, (1920)3 , shows the frequency of accidents occurring, over a ?ve-week period, to 647 women making high explosives during World War I.

  How much would you be willing to pay for it today

The company's marginal tax rate is 40%. If you require a 20% rate of return on a stock such as this, how much would you be willing to pay for it today?

  A year ago the green technologies growth fund was being

a year ago the green technologies growth fund was being quoted at an nav of 21.50 and an offer price of 23.35 today

  Determine the amounts of any cash inflows or outflows

The following account balances relate to the stockholders' equity accounts of Gore Corporation at the year end.

  You have your choice of two investment accounts investment

you have your choice of two investment accounts. investment a is a 5-year annuity that features end-of-month 2500

  Get a margin call if the stock price falls

Hailey purchase 400 shares of MLP common stock on margin at $25 per share. The initial margin is 60% and the maintenance margin is 40%. You will get a margin call if the stock price falls below

  If casualty insurance companies provided fire insurance

if casualty insurance companies provided fire insurance without any restrictions what kind of adverse selection and

  What would likely happen without your plan being implemented

What are the advantages & disadvantages of each estate planning strategy? What would likely happen without your plan being implemented?

  How future markets can reduce interest rate

Discuss how the futures markets can be employed to reduce interest rate and input price risk.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd