Q1: We have a callable preferred stock after 5 years at $104 that pays $4 annual dividend. If the yields for this type of instruments are 6%, What price do they fetch in the market?
Q2: We buy a 8% coupon bond now, when market rates are 10%, and intend to sell it in 3 years when market rates are 6%. What should we pay now?
Immediate help required !!!
1. 94.564
2. 95.026 (excluding 6% option, can't understand how market rate is predicted for future because the same is not possible)
Chiranjiv Kumar, Thank you very much for the reply. Can you please explain the steps for part (b). It is an exam question, so i didnt have the explanation. Thanks in advance.
Your welcome,
by taking 100 rs. bond value and 8% coupon rate and discounting it at 10%. Don't know the role of 6%
CAclubindia
