Question

Sascha owns stock in Lewis Corp and a $5,000 corporate bond. She received $52.50 in quarterly interest from the bond. Sascha's Lewis Corp stock is worth $46 per share and pays a $2 annual dividend. Which is higher, the yield on the stock or the annual interest rate on the bond?

a) Yield on the stock
b) Annual interest rate on the bond
c) They are equal
d) Cannot be determined from the given information

Answer 1

The yield on Sascha's Lewis Corp stock is 4.35%, while the annual interest rate on her $5,000 corporate bond is 4.2%. Therefore, the yield on the stock is higher than the annual interest rate on the bond.

Step-by-step explanation:

To compare the yield on the stock with the annual interest rate on the bond, we need to calculate both values for Sascha's investments.

For the Lewis Corp stock, the yield is calculated as follows:

• Dividend Yield = Annual Dividends Per Share / Price Per Share
• Dividend Yield = $2 / $46
• Dividend Yield = 0.0435 or 4.35%

For the corporate bond, Sascha receives $52.50 quarterly in interest, which amounts to $52.50 x 4 = $210 annually. Since the face value of the bond is $5,000, the interest rate can be calculated as:

• Annual Interest Rate = Annual Interest / Principal
• Annual Interest Rate = $210 / $5,000
• Annual Interest Rate = 0.042 or 4.2%

Comparing the two yields, the yield on the stock at 4.35% is slightly higher than the annual interest rate on the bond at 4.2%. Therefore, the yield on the stock is higher than the annual interest rate on the bond.

Answer: a) Yield on the stock