User Account

All Pages

Relationship observed between ratings and yield to maturity

Assignment Help Financial Management
Reference no: EM13945940

Question:

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 (?)

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: EM13945940

Questions Cloud

Draw a print ad rough layout on a blank piece of letter : Draw a print ad rough layout (using the slogan) on a blank piece of letter sized paper (stick figures are fine) Scan and upload (or take a photo and upload).
What are the critical responsibilities for the manager : Define information technology and information systems in APA style
Include an inventory chart with relevant categories : Include an inventory chart with relevant categories - Categorize the inventory based on departments, units, and teams.
Crime types are fraud, money laundering or cyber crime : Select one of the crime types from Assessment Item 2 to prepare an analytical critique of the legislative, regulatory, investigative and industrial responses to the chosen financial crime type in your domicile.
Relationship observed between ratings and yield to maturity : 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.
Difference between re-engineering and process redesign : What is the process of creating design specifications and what are differences between design testing and functional testing?
Provide commentary about the characteristics of countries : The World Investment Report published annually by UNCTAD provides quick electronic access to comprehensive statistics on foreign direct investment (FDI) and the operations of transnational corporations. Gather a list of the top transnational corpo..
Do you think increasing age diversity will create challenges : Do you think increasing age diversity will create new challenges for managers? What types of challenges do you expect will be most profound?
Lists the causes for the decrease in crime : The author, Steven Levitt, lists the causes for the decrease in crime that occurred in the U.S. during the 1990's that were mentioned in newspaper articles. What were they

Reviews

Write a Review

Financial Management Questions & Answers

  Calculate selected ratios and obtain industry averages

Calculate selected ratios and obtain industry averages for comparison and select a company and copy/paste its financial statements

  Represent additional operating costs

XYZ Corp. is looking to lease some machinery from CamCorp. The cost of the machinery is $30,000 and the annual lease payments made at the beginning of each year are $8,000. The lease will last for 3 years, but the asset will be depreciated using a 5-..

  Present value of these payments if the discount rate

You will receive annual payments of $2,400 at the end of each year for 15 years. The first payment will be received in year 6. What is the present value of these payments if the discount rate is 7 percent?

  What is the maximum dollar amount of costly trade credit

Fairweather Corporation purchases merchandise on terms of 2/15, net 40, and its gross purchases (i.e., purchases before taking off the discount) are $800,000 per year. What is the maximum dollar amount of costly trade credit the firm could get, assum..

  Analysis of the financial statements

Analysis of the financial statements and provide a recommendation as to whether XYZ should invest or not invest in this company.

  Describe what a qualified mortgage is

Describe what a qualified mortgage' is and explain the elements of the ability to repay rule.

  Explain the default risk and liquidity premiums for bonds

The default risk and liquidity premiums for this company's bonds total 0.9 percent and are believed to be the same for all bonds issued by this company. If the average inflation rate is expected to be 5 percent for years 5, 6, and 7, what is the y..

  Require stead to ked your after-tax real yield

Several years ago, a Texas bank offered a thirty-year CD with an annual return indexed to inflation. The rate offered was the annual percentage increase in the CPI plus 4 percent. Show the after-tax real return you would earn, assuming that the infla..

  Specific on the tools of monetary policy

The economy is slowing down, not growing and unemployment is going up. If you are on the Federal Reserve Board of Governors what type of policy would you pursue? Please be specific on the tools of monetary policy.

  Analyst will make regarding the investment opportunity

An analyst evaluting the North facility expects that the project will be financed by debt that costs the firm 7%. What recommendation do you think this analyst will make regarding the investment opportunity? Another analyst assigned to study the Sout..

  Find the estimated cast for a production level

Total costs were $76,700 when $26,000 units were produced and $95,000 when 37,000 units were produced. Use the high-low method to find the estimated cast for a production level of 32,000 units.

  What was fieldings projected loss

Cost of goods sold is 60% of sales. Purchases are made and paid for two months prior to the sale. 40% of sales are collected in the month of the sale. 40% are collected in the month following the ale, and the remaining 20% in the second month followi..

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!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

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