Coupon growth bond with the terms

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Reference no: EM132009469

1. BLB Ltd has just issues a "coupon growth bond" with the following terms. Each bond's face (or maturity) value is $1,000 and the bonds will mature in 5 years' time. Coupons will be paid on an annual basis at the end of each year. The first year's coupon will be $100 at the end of year 1, which will then grow at an annual rate of 10% until the bond matures. If the bond's yielf to maturity is 8% per annum, its price today should be closest to:

a) $972

b) $1,080

c) $1,161

d) $1,275

2. Fool's Gold Mines (FGM) suspended its dividends today because of delays in obtaining permits for its overseas mines. Suppose you expect FGM to resume annual dividends in four years' time, with a dividend of $0.80 per share, growing by 4% per annum forever. If FGM's required return on equity is 10% p.a., its share price today will be closest to:

a) $6.00

b) $8.00

c) $10.00

d) $13.30

Reference no: EM132009469

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