Required return to differ from the coupon interest rate

Assignment Help Financial Management
Reference no: EM13953651

Bond value and changing required returns Midland Utilities has outstanding a bond issue that will mature to its $1,000 par value in 12 years. The bond has a coupon interest rate of 11% and pays interest annually.

a. Find the value of the bond if the required return is (1) 11%, (2) 15%, and (3) 8%.

b. Plot your findings in part a on a set of “required return (x axis)–market value of bond (y axis)” axes.

c. Use your findings in parts a and b to discuss the relationship between the coupon interest rate on a bond and the required return and the market value of the bond relative to its par value.

d. What two possible reasons could cause the required return to differ from the coupon interest rate?

Reference no: EM13953651

Questions Cloud

Equivalent currency : U.S. $ EQUIVALENT CURRENCY PER U.S. $ Polish Zloty .2977 3.3586 Euro 1.2183 .8208 Mexican Peso .0752 13.2989 . If you have $200, how many Polish zlotys can you get? If you have 5.90 million euros, how many dollars do you have?  Which is worth more, a..
Focus on reducing external failure cost : Part 3 Next, you focus on reducing external failure cost. You analyze the cost of returned burgers and determine 70% of returns are due to wrong ingredients. Compute NPV for the new terminal with 40% tax rate and Barry's cost of capital = 10% Year 0 ..
Regarding the estimate of a firms cost of equity capital : Which of the following is false regarding the estimate of a firms cost of equity capital
Between an information announcement and the stock price : Which of the following does not correctly complete this sentence: In general the link between an information announcement and the stock price is that_____
Required return to differ from the coupon interest rate : Bond value and changing required returns Midland Utilities has outstanding a bond issue that will mature to its $1,000 par value in 12 years. The bond has a coupon interest rate of 11% and pays interest annually. Plot your findings in part a on a set..
What are the additional funds needed : Winter snowboard inc. sales are expected to increase 10% in 2014 from$15 million in 2013. Its assets at the end of 2013 were $5 million. The company is at full capacity, so its assets muct grow at the same rate as projected sales. The after- tax prof..
What is the standard deviation of the project : There are three scenarios for a project. The best case scenario has an NPV of $2000 and probability 0f 30%. The base case scenario has an NPV of $1000 and probability of 45%. The worst case scenario has an NPV of $-5000 and probability of 25%. What i..
About calculating expected portfilio returns and variances : Which one is false about calculating expected portfilio returns and variances?
What is the expected rate of return on the stock : Steady As She Goes, Inc., will pay a year-end dividend of $3.70 per share. Investors expect the dividend to grow at a rate of 5% indefinitely. If the stock currently sells for $37 per share, what is the expected rate of return on the stock?

Reviews

Write a Review

 

Financial Management Questions & Answers

  What will be each of these blance sheet entries after

A firms balance sheet has the following entries: what will be each of these blance sheet entries after:

  Cash liquidity to fund any margin calls

Suppose a farmer is expecting that her crop of oranges will be ready for harvest and sale as 150,000 pounds of orange juice in 3 months time. Suppose each orange juice futures contract is for 15,000 pounds of orange juice, and the current futures pri..

  Analyse the current financial state of anthonys orchard

Analyse the current financial state of Anthony's Orchard and evaluate the impact of a major customer cancelling their expected order.

  Reorder the data to reflect income statement format

From the text " Fundamentals of Healthcare Finance" 2nd edition by Louis C. Gapenski, page 352 end of chapter problem 11.1. Entries for the Warren Clinic 2012 income statement are listed below in alphabetical order. Reorder the data to reflect income..

  What is the companys cost of common equity

COST OF EQUITY WITH AND WITHOUT FLOTATION Javits & Sons’s common stock currently trades at $30.00 a share. It is expected to pay an annual dividend of $3.00 a share at the end of the year , and the constant growth rate is 5% a year. What is the compa..

  What is the expected standard deviation of the portfolio

What is the expected standard deviation of the portfolio of the two stocks? Which stock is the better buy in the current market? Why?

  Bond with a face value of annual coupon payments

A bond with a face value of $1,000 has annual coupon payments of $100 and was issued seven years ago. The bond currently sells for $1,085, has eight years left to maturity. This bond's ________ must be less than 10%.

  Historical data refer to annual return or the stock prices

If I want to calculate expected return of a company using historical data, what kind of historical data should I use? Where can I get the historical data? does the historical data refer to annual return or the stock prices?

  Considering two alternative planes

Zappe Airlines is considering two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce after-tax cash flows of $35 million per year. Plane B has a life of 10 years, will cost $138 million, and will pro..

  Find an existing budget from a published source

Using the existing budget, create a new budget for the next fiscal year. Set out the details of all the assumptions you needed in order to build this budget.

  Current price under this new assumption of growth rate

A company currently pays a dividend of $2.0 per share. It is estimated that the company's dividend will grow at a rate of 20% per year for the next 4 years, and that the dividend will grow at a constant rate of 7% thereafter. What is your estimate of..

  What is the firms current receivables balance

Fargo Memorial Hospital has annual net patient service revenues of $14,400,000. It has two major third-party payers, plus some of its patient is self-payers. The hospitals patient accounts manager estimates that 10% of the hospitals paying patients (..

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