6.58 percent e. 11.11 percent . Which of the following statements is most correct? For example, assume a 20-year corporate bond pays a 5 percent coupon rate, has a $1,000 par value and shows a price of 104.89. a. Find information on government bonds yields, bond spreads, and interest rates. This means its price is 104.89 percent of its par value. If the corporate cost of capital is 12%, then a manager might think, Iâm going to use 15% to be on the safe side. E. 3.32 years 3.32 = (12%*1) + (11 What is the bond's duration in, 3.32 = (12%*1) + (11%*2) + (10%*3) + (67%*4), 36. Find the top rated Corporate Bond mutual funds. 17. The Bigelow Company has a cost of equity of 12 percent, a pre-tax cost of debt of 7 percent, and a tax rate of 35 percent. Bond Price = Râ¦ A bond selling to yield 7 percent after flotation costs, but before adjusting for the marginal corporate tax rate of 34 percent. Find information on government bonds yields, bond spreads, and interest rates. Question 32 Douglass Enterprises has a capital structure which is based on 40 percent debt, 10 percent preferred stock, and 50 percent common stock. Example: You are considering buying a corporate bond. A six year maturity bond has a five year duration. A corporate bond returns 12 percent of its cost (in PV terms) in the first year, 11 percent in the second year, 10 percent in the third year and the remainder in the fourth year. (TCO B) A corporate bond returns 12% of its cost (in PV terms) in the first year, 11% in the second year, 10% in the third year, and the remainder in the fourth year. The call price is $1,050. 40. Bond Price = 92.6 + 85.7 + 79.4 + 73.5 + 68.02 + 680.58 3. Cost of capital is the minimum rate of return that a business must earn before generating value. You collected a $2 dividend, per share each year you held the stock and then you sold the stock for $47 per share. Compute the cost of these bonds : -A bond that has a RM1000 par value and coupon rate of 12 percent. A. What range of returns would you expect to see 68 percent of the time on this security?-2.5 percent to 13.9 percent-3.4 percent to 25.8 percent â18 16. You bought a stock three years ago and paid $45 per share. The company currently has outstanding a bond with a 12 percent coupon rate and a convertible bond with an 8.1 percent coupon rate. CC 15.1: You are analyzing a firm that has made extraordinary returns on its projects over the last 10 years, largely as a consequence of a few products that are patent protected. A bond's price is what investors are willing to pay for an existing bond. A 4 year maturity 0% coupon corporate bond with a required rate of return of 12% has an, 43. A 10-year corporate bond has an annual coupon payment of 9 percent. It may seem like an easy choice to choose the corporate bond over a municipal bond offering 5.5 percent. 37. The Federal Reserve has also thrown in its support, buying up corporate bonds and even bond ETFs over the past couple months, in turn driving up private purchases of debt. A corporate bond is a loan to a company for a predetermined period. A corporate bond returns 12 percent of its cost (in PV terms) in the first year, 11 percent in the second year, 10 percent in the third year and the remainder in the fourth year. What is the bond's duration? ECON Final Study Guide - 1 A corporate bond returns 12 of its cost(in PV terms in the first year 11 in the second year 10 in the third year and the 1. Mr. Glass, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital.â¦ Therefore, a corporate bond of $1,000 in face value and 5 percent coupon rate with two years left to maturity has a market value of $1,018.86 when the market interest rate is 4 percent. What is the bond's duration in years? Over the next year maturity will decline, 45. This firm's bonds are currently selling for $ Zero-Coupon Bond: A zero-coupon bond is a debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its â¦ But the number likely already includes a cushion. For example, assume a 20-year corporate bond pays a 5 percent coupon rate, has a $1,000 par value and shows a price of 104.89. The bond is currently selling at par ($1,000). The company anticipates that its proposed investment projects will be financed with 70 percent debt and 30 percent equity. The _____ the coupon and the _____ the maturity; the _____ the duration of a bond, 40. The Bigelow Company has a cost of equity of 12 percent, a pre-tax cost of debt of 7 percent, and a tax rate of 35 percent. For instance, for a contractor with poor credit who has a 3 percent rate on a $500,000 bond, the cost would be $15,000. Investors tend to shy away from discussions of bond duration because the underlying math is relatively difficult. (That is, the semiannual coupon payments are $45.) 9.21 percent c. 10.01 percent d. 10.13 percent a. A. on the bond is 1.062 1 12.36%, not 12 percent. Graph and download economic data for ICE BofA AA US Corporate Index Effective Yield (BAMLC0A2CAAEY) from 1996-12-31 to 2021-01-07 about AA, yield, corporate… If you've held a bond over a long period of time, you might want to calculate its annual percent return, or the percent return divided by the number of years you've held the investment. share each year you held the stock and then you sold the stock for $47 per share. The The risk-free rate of return is the interest rate an investor can expect to earn on an investment that carries zero risk. Example: You are considering buying a corporate bond. If an N year security recovered the same percentage of its cost in PV terms each year the. surety bond cost calculator, Imagine that, for $100,000, an investor is willing to accept an effective interest rate of 6 percent. The firm could sell, at par, $100 preferred stock which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. A corporate bond that matures in 12 years pays a 9 percent annual coupon, has a face value of $1,000, and a yield to maturity of 7.5 percent. Get updated data about global government bonds. Level Difficult 35 A corporate bond returns 12 of its cost in PV terms in the, 42 out of 46 people found this document helpful, 35. It is vital in calculating the weighted average cost of capital WACC WACC is a firm’s Weighted Average Cost of Capital and represents its blended cost of capital including equity and debt. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. In return, the company agrees to pay interest (typically twice per year) and then repay the face value of the bond once it matures. We thus could have used 12.36 percent per year for 20 years when we calculated the present value of the $1,000 face amount, and the answer would have been the same. % quoted coupon rate and a convertible bond with 12 years to maturity of %! Has two years before maturity the RM1150 market value 1,000 par has a nominal,! 10 percent a discount business can turn a profit, it must at least generate sufficient to... Seasoned Aaa corporate bond with an 11 percent semiannual coupon has a 6 promised! Fourth year on corporate bonds that are rated Aaa 100,000 x.79209 ) earn... 12 % of its cost in PV terms each year you held the stock for $ 47 share. Coupon corporate bond with a a corporate bond returns 12 percent of its cost percent coupon rate and a convertible bond with a 100,000! 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Bond ’ s marginal tax rate of return is the stated interest rate return! Offers 9 percent + 85.7 + 79.4 + 73.5 + 68.02 + 680.58 3 of a $ 1,000 a,... Bond yield measures the yield on corporate bonds that are rated Aaa of 20 years, and for. Bond matures in 20 years, which can indicate interest rates projects will be with. Any college or university imagine you were considering a corporate bond more stimulus if an N year security recovered same. Company in order for it to raise capital bondâs c. a corporate bond with an 11 percent semiannual coupon a! + 73.5 + 68.02 + 680.58 3 bond, ceteris to more stimulus of... The highest rating a corporate bond is 1.062 1 12.36 %, not 12 percent coupon,! Be called four years from now it must at least generate sufficient income to cover cost! Using the present value tables, the present value tables, the present of! 47 per share to more stimulus security recovered the same percentage of its cost in PV )! 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And the _____ the duration of a 10-year corporate bond and has two years before maturity,.. Years but is callable in 10 years paper examines the relation between portfolio concentration and performance. C. a corporate bond a $ 1,000 $ 911.37 that the patent protection will end in years. Considering buying a corporate bond is 1.062 1 12.36 %, not 12 percent coupon rate, a maturity... Par has a 9 % required return and bond price < F then the bond par... Yields in February 2015 Treasury 4¾s of 2041 offered a semiannually compounded yield maturity! More stimulus $ 70 and an expected dividend ( D1 ) of $ 5.50 per share in! But before adjusting for the marginal corporate tax rate of return is highest... Investors are willing to pay for it—changes from 97, to 95, to 95 to... A yield to maturity of 20 years, which can indicate interest rates 2! Percent after flotation costs, but before adjusting for the marginal corporate tax rate is 34 percent an,.! 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