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Application of duration
· Draw the price-ytm(i) graph for a 5% fixed-coupon bond that has 10 years to maturity (assuming annual coupon payments).
· Calculate the duration for this bond if the interest rate is 3%.
· What is the approximate percentage change in price if the interest rate rises to 5%? (calculate the price change using the duration approach)
· What is the actual percentage change in price if the interest rate rises to 5%?
The owner of ABC Corp. wishes to take her stock public for the first time by selling 10 million shares. The underwriter determines that the true value will be $30 with probability .4 and $10 with probability .6. what is the expected percentage chang..
Bond Valuation with Annual Payments Jackson Corporation's bonds have 5 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 7.5%. The bonds have a yield to maturity of 6%. What is ..
The standard deviation on small company stocks:
Butler Corp paid a dividend today of $3.50 per share. The dividend is expected to grow at a constant rate of 8% per year. If Butler Corp stock is selling for $75.60 per share, the stockholders' expected rate of return is:
The two most basic components of any investment opportunity are risk and return. Define each and explain how they are related in the investment world. Why does their relationship matter to you as an investor?
According to the tax effect theory, investors prefer dividends and, as a result, the higher the payout ratio, the higher the value of the firm. According to the dividend preference (bird-in-the-hand) theory, investors prefer cash to paper (stock), so..
Southern Home Cookin' just paid its annual dividend of $.70 a share. The stock has a market price of $28 and a beta of 0.9. The return on the U.S. Treasury bill is 4 percent and the market risk premium is 12 percent. What is the cost of equity?
ABC Company has a cost of goods of 60% of the selling price of its products. It has $250,000 in fixed overhead for administrative expenses, rent and salaries. In addition, it spends 18% of every sales dollar on marketing. What is the company’s break-..
Clay Harden borrowed $37,000 from a bank at an interest rate of 8% compounded monthly. The loan will be repaid in 36 equal monthly installments over three years. Immediately after his 22th payment, Clay desires to pay the remainder of the loan in a s..
Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 36% of the company’s present value, and you believe that at this capital structure the company’s d..
An investment offers $10,400 per year for 13 years, with the first payment occurring 1 year from now. Assume the required return is 12 percent.What is the value of the investment today? What would the value be if the payments occurred for 38 years?
Felicia & Fred’s executive board have asked you to complete a decision model for their intended refurbishment of the former mill building. In order to make an appropriate decision, the executive team has provided you with the following information re..
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