Question
(a) ABC Company is issuing an issue of bonds with a 15-year maturity, a $1,000 par value, and a 10 percent coupon rate. Today, the
(a) ABC Company is issuing an issue of bonds with a 15-year maturity, a $1,000 par value, and a 10 percent coupon rate. Today, the going rate of interest on bonds such as these is 12 percent. In your opinion, what is the appropriate selling price for this bond? (3 marks)
(b) You are thinking of buying a share of ABC Company. You expect this company to pay dividends of $1.00, $1.15, $1.20 and $1.25 in Years 1, 2, 3 and 4, respectively, and you expect to sell it at a price of $20 at the end of 4 years. Assuming your expected rate of return is 10%, what price are you willing to pay for this stock?
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