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Chapter 5: Q10DQ (page 524)

What is the difference between the following yields: coupon rate, current yield, and yield to maturity? (LO16-2)

Short Answer

Expert verified

The coupon rate states the interest amount divided by the bond鈥檚 par value.

The current yield states the interest amount divided by the current price.

The yield to maturity states the total payment due to a bondholder, including principal and interest

Step by step solution

01

Bonds

Bonds are one of thesources of funds for the corporations that facilitate the business to function its operations smoothly. Long-term and short-term bonds are two major types of bonds.

02

The difference between various yields

  • Coupon rate: The coupon rate states the interest payment divided by the bond鈥檚 par value.
  • Current yield: The current yield states the interest payment divided by the bond鈥檚 current price.
  • Yield to maturity: The yield to maturity is theinterest rate that will equate future interest payments and the payment at maturity (principal payment) to the current market price.

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Most popular questions from this chapter

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

c. Compute the earnings per share immediately after the stock issue.

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

b. Compute the earnings per share immediately before the stock issue.

Under what circumstances would a call on a bond be exercised by a corporation? What is the purpose of a deferred call? (LO16-3)

What cost of capital is generally used in evaluating a bond refunding decision? Why?

Question: The Bowman Corporation has a \(18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new \)18,000,000 issue is \(530,000, and the underwriting cost on the old issue was \)380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.

a. Calculate the present value of total outflows.
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