Project: Bond and Coupon Rate Essay

Submitted By sweetguynj28
Words: 1314
Pages: 6

Matthew Tango
Course Project Part 1

Task 1

1. Calculate the EAR’s of 2 different banks.

1st bank- National First. APR is 6.75%+3.25%=10%
Since interest is compounded semiannually it would be 5% every 6 months.
Which means for every in a year you will earn .25 cents in interest which is
$1*1.05^2=1.1025-1.1000=.25 which now makes the EAR for the first bank 10.25%

2nd bank- Regions Best. APR is 13.17% compounded monthly.
So first we have to find out the interest for each month which is going to be .1317/12=.010975 or 1.09% per month. Next you find out what it would grow to $1*1.010975^12=1.13994 or 13.99% which is the EAR for the second bank.

2. So based on the calculations above I would have to go with National First bank for the loan. The reason I am choosing them is because there EAR is at a lower percentage than Regions Best. The fact that the EAR is lower means that the overall amount of interest the loan would accrue would be much lower so it would be a cheaper loan to pay back over the amount of time they have the loan.

3. Ok so first what we are going to do is find out how many months there are in 5 years. There are 12 months in one year so we multiply 12*5=60. Next we find out how much interest we have per month of the loan (8.6/12=.7167). The total loan amount is 6,950.00. So now we go and calculate what the monthly payment would be for this loan.
PVA = C({1 – [1/(1 + r)]t } / r)
$6,950,000 = $C[1 – {1 / [1 + (.086/12)]60} / (.086/12)]
So when we solve the equation we get C=6,950,000/48.62687
Now when we solve for C we get C=$142,925 per month
By taking a smaller amount loan will save them money that they will need to pay back in the end. If they don’t borrow enough they may end up closing because they ran out of money to get their feet off the ground. It all comes down to saving money now and taking that chance of starting quickly, or spending money now to get the factory set up and make money later.
Task 2

1. For my first task I have chosen the Boeing industry and I am using the numbers as of 1/4/2013. The dividend as of today was $1.94 and the price was $77.69. Now we calculate the rate of return for this stock.
We use the equation R = D1/P0+g, now we fill in the equation
R=1.94(1+.05)/77.69+.05=1.94*1.05/77.74=2.037/77.74=.026 or 2.6%
Our rate of return for this stock is 2.6%

2. Ok to calculate the current share price the equation that we will use is P0=D0x(1+g)/R-g. Now what we are going to do is fill in the equation.
P=1.5(1+.01)/.026-.01=1.5(1.01)/.016=1.515/.0.16=94.687 rounded up is $94.69. So the current share price of the stock would be $94.69.

3. Well to answer this question you first have to find out what the main differences are between the two different types of stock. Preferred stocks have a set dividend while on common stocks the dividend can change. Another main difference is that on preferred stocks they pay out there dividends on regular intervals where as the common stocks can vary. Therefore preferred stocks can be considered as fixed-income security. Based on this I would think the common stock would have the higher price because the dividends can grow over time but the safer, less riskier move would be the preferred stock.

4. Ok well to answer this question we have to figure out what will happen to the price if we increase the dividend of a stock. So let’s go back to the example we had in question 2 and put in a higher price for the dividend to see what would happen. 2(1.01)/.016=2.02/.016=$126.25. Based on what we see here the stock price would go up if the dividends increase. Now for the second part of this question we can do the same thing just raise the rate of return that we were using and see what would happen to the price. So in the original equation let’s raise the rate of return from 2.6% to 4%. 1.515/.04-.01=1.515/.03=$50.50. So as we see here if the rate of return increases the stock price will be lower. As we saw…