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Chapter 5: 10DQ (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’s 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 the sources of fundsfor 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’s par value.
  • Current yield: The current yield states the interest payment divided by the bond’s current price.
  • Yield to maturity: The yield to maturity is the interest 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.

e. Determine what rate of return must be earned on the proceeds to the corporation so there will be a 10 percent increase in earnings per share during the year of going public.

Question: The management of Mitchell Labs decided to go private in 2002 by buying in all 2.80 million of its outstanding shares at \(24.80 per share. By 2006, management had restructured the company by selling off the petroleum research division for \)10.75 million, the fiber technology division for \(8.45 million, and the synthetic products division for \)20 million. Because these divisions had been only marginally profitable, Mitchell Labs is a stronger company after the restructuring. Mitchell is now able to concentrate exclusively on contract research and will generate earnings per share of $1.10 this year. Investment bankers have contacted the firm and indicated that if it reentered the public market, the 2.80 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 15 times earnings per share.

b. What is the total value to the company from (1) the proceeds of the divisions that were sold, as well as (2) the current value of the 2.80 million shares (based on current earnings and an anticipated P/E of 15)?

The Presley Corporation is about to go public. It currently has after-tax earnings of \(7,200,000, and 2,100,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 800,000 new shares. The new shares will be priced to the public at \)25 per share, with a 5 percent spread on the offering price. There will also be $260,000 in out-of-pocket costs to the corporation.

d. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public.

The Pioneer Petroleum Corporation has a bond outstanding with an \(85 annual interest payment, a market price of \)800, and a maturity date in five years. Find the following:

a. The coupon rate.

b. The current rate.

c. The yield to maturity

If a company were looking for capital by way of a private placement, where would it look for funds?
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