Question

The yield-to-maturity on a bond is the interest rate you earn on your investment if interest rates do not change. If you actually sell the bond before it matures, your realized return is known as the holding period yield. Suppose that today you buy a 9 percent annual coupon bond for $1,000. The bond has 12 years to maturity. Three years from now, the yield-to-maturity has declined to 7 percent and you decide to sell. What is your holding period yield?

2. Suppose you know a company's stock currently sells for $60 per share and the required return on the stock is 8 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield.


Required:

If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?

Answer 1

1. r = 12.83%

2. Dividend = 2.40

Step-by-step explanation:

(1) Price at Year 3 :

`P3=[1,000*0.09]*(1-[(1)/((1+0.07)^(12-3))] )/(0.07) +(1,000)/((1+0.07)^(12-3))`

P3 = $1130.31

Yield:

`1,000=[1,000* 0.09]*(1-[(1)/((1+r)^(3))] )/(r) +(1,000)/((1+r)^(3))`

r = 12.83%

(2) Given Dividend Yield:

= 8 ÷ 2

= 4%

Dividend Yield = Dividend ÷ Current Price

4% = Dividend ÷ 60

Dividend = 2.40