Briefly Explain the Relationship between time to Maturity and the Sensitivity of Bond Prices to Interest Rates - Accounting and Finance Assignment Help

Assignment Task:

Task:

QUESTION 1 (13 Marks) a. Pacific Brands Ltd issued 10-year coupon bonds 4 years ago with a coupon rate of 9%. Today new bonds of similar risk and maturity will pay a coupon rate of 7%. At the time of issue, all new bonds are sold at par. Assuming semi-annual coupon payments and a face value of $1,000 per bond, calculate the current market price of the company’s bond. (5 marks) 

QUESTION 1 Continued: b. Pacific Brands is also planning to fund a new development project by issuing 5-year zero coupon bonds with a face value of $1,000 per bond. Investors’ required rate of return is 12% per annum, quarterly compounded. Calculate the issue price of this bond. (5 marks)

c. Briefly explain the relationship between time to maturity and the sensitivity of bond prices to interest rates. (3 marks) 

QUESTION 2 (17 Marks) a. Explain why preference shares are considered to be a hybrid of equity and debt securities. (4 marks)

b. Maurica Limited is a consumer products company growing at a constant rate of 6.5%. The company’s last dividend was $3.36. If the required rate of return was 14%, calculate the market value of this share. (5 marks) 

QUESTION 2 Continued: c. Theta Limited projects a rapid growth of 30% for the next 2 years from now, then a growth rate of 15% for the following 2 years. After that, the company expects a constant growth rate of 5%. The company just paid a dividend of $2 per share yesterday. If your required rate of return on such shares is 20%, calculate the maximum price you are willing to pay today for Theta’s shares. (8 marks) 

QUESTION 3 (20 Marks) a. The Balance Sheet of Stonefield Limited shows long-term bonds of $200 million, preference shares of $50 million, and owners’ equity of $300 million. The bonds with a face value of $100 each. The bonds carry a coupon of 7%, paid annually, have a remaining life of exactly five years, and currently trade at a yield of 10%. There are 50 million preference shares outstanding. The preference shares are currently traded at a price of $3 per share. Stonefield pays a $0.36 annual dividend per share to preference shareholders. Stonefield has 100 million ordinary shares on issue and the current share price is $4.70. Stonefield’s shares have an equity beta of 1.8. The five-year government bond yield is 4% and the return on market portfolio is estimated at 9.5%. The company tax rate is 28%. (i) Calculate the weights of long-term bonds, preference shares, and owners’ equity based on market values. (3 marks)

(a) Continued:

(ii) Calculate Stonefield’s Cost of Equity using the Capital Asset Pricing Model (CAPM).

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