User Account

All Pages

Current yield better estimate of yield to maturity

Assignment Help Financial Management
Reference no: EM131536465

Consider the following data for bonds issued by Home Depot and Chevron. Both bonds have 9 years to maturity. The Home Depot bond has a coupon rate of 3.00% and a price of 100.231 (% of FV). The Chevron bond has a coupon rate of 2.50% and a price of 95.305 (% of FV). The bonds make semi-annual coupon payments.

a. Which bond is selling at a premium to par, and which bond is selling at a discount to par?

b. What is the relationship between coupon rate and yield to maturity for bonds selling at a discount to par? What is the relationship between coupon rate and yield to maturity for bonds selling at a premium to par? Given your answer, will the yield to maturity on the Home Depot bond be greater or less than 3.00%? Will the yield to maturity on the Chevron bond be greater or less than 2.50%?

c. Calculate the yield to maturity and current yield for each bond. For which bond is current yield a better estimate of yield to maturity?

d. An investor with a 3-year holding period purchases the Chevron bond. Coupons will be reinvested semiannually at a semiannual reinvestment rate of 1%. At the end of 3 years, the investor expects that the bond will sell at a yield to maturity of 2.8%. What is the investor’s forecasted compound yield (since this bond makes semi-annual coupon payments, you need to do semiannual compounding)?

e. Consider the three different yield calculations for the Chevron bond: current yield, yield to maturity, forecasted compound yield. What is one major shortcoming of each of these yield measures?

Reference no: EM131536465

Questions Cloud

What are the coupon rate and the current yield on this bond : What are the coupon rate and the current yield on this bond on the date of issue?
How person is compensated help anticipate information biases : An accounting professional requires at least two skill sets. The first is to be technically competent. Knowing how to capture, manage, and report information.
Calculate the expected salary for the truck driver : Why is it that when you calculate the expected salary for the truck driver you multiply 5000(1-1/10000) instead of of 12,000(1-1/10000)
What was the social and political structure : What was the social and political structure of the Germanic world prior to entry into the Roman Empire-How did interaction with the empire
Current yield better estimate of yield to maturity : Calculate the yield to maturity and current yield for each bond. For which bond is current yield a better estimate of yield to maturity?
Why comparative advantage is important : Why comparative advantage is important, and whether it is usually followed by policy makers?
New market equilibrium price and quantity : If a price ceiling on real estate agency commission is set at 1% only, what will be the impact on new market equilibrium price and quantity of residential real
Show what you offer over other candidates : Assume that you are preparing for a second interview with a manufacturing company. The company is impressed with your credentials but has indicated.
What is the payback period for this investment : What is the payback period for this investment?

Reviews

Write a Review

Financial Management Questions & Answers

  What is the dividend yield and capital gains yield

Calculate the required return for a stock which expects to pay a dividend of $1.50 this year. The dividends are growing at 2%, and the stock currently trades at $34.50 per share. What is the dividend yield and capital gains yield?

  What are the required annual beginning-of-year lease payment

Ajax desires to earn a 12 percent after-tax rate of return on this lease. What are the required annual beginning-of-year lease payments?

  Discounted valuation of the future dividends

Apple will start paying its first dividend 4 years from now in the amount of $26 per share. Over the following 10 years, MIke projected that the dividends would grow by 16% per year, after which the growth rate would be a constant rate of 4%, forever..

  Considering leasing new robotic milling control system

Your firm is considering leasing a new robotic milling control system. The lease lasts for 4 years. The lease calls for 5 payments of $280,000 per year with the first payment occurring at lease inception. The system would cost $900,000 to buy and wou..

  Calculate cash flow for jelly fences

What was the profit for the year and the operating cash flows for Outback Fences if the tax rate is 30%?- Calculate Cash-flow for Jelly Fences for the year 2016.

  Qualified plan distributions will be subjected

Which of the following qualified plan distributions will be subjected to a 10% early withdrawal penalty?

  Accounting and financial statements

Demonstrate an understanding of governmental and not-for-profit accounting and financial statements. Analyze transactions unique to governmental and not-for-profit entities to determine potential outcomes

  Unlevered value-what is the current value of company

Letang Corporation expects an EBIT of $23,250 every year forever. The company currently has no debt, and its cost of equity is 15 percent. The company can borrow at 8.5 percent and the corporate tax rate is 38. Requirement 1: What is the current valu..

  Bond yield and after-tax cost of debt

A company's 6% coupon rate, semiannual payment, $1,000 par value bond that matures in 20 years sells at a price of $615.37. The company's federal-plus-state tax rate is 30%. What is the firm's after-tax component cost of debt for purposes of calculat..

  Event marketing-report current event marketing effort

Event Marketing: Please report a current event marketing effort. You could use a local newspaper such as Houston Chronicle, etc.

  What is their operating cycle and cash conversion cycle

Camp Manufacturing currently has average inventories of 90 days and accounts receivable are typically collected in 60 days. Camp’s payables are paid 30 days after the invoice is received. The company has sales of $30,000,000. Using a 365 day year, Wh..

  Exchange rate movement relationship and interest rate parity

Which of the following is true according to the expected exchange rate movement relationship and interest rate parity, respectively?

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