What are the prices of the two bonds

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Reference no: EM13203989

Question

a Kangaroo Ltd and Wombat Ltd operate in the same industry and you reason that their discount rates are similar, approximately 8%. Kangaroo Ltd has a share price of $5.00, and is forecasted to pay a dividend of 20 cents per share next year. Wombat Ltd has a share price of $8.50, and is forecast to pay a dividend of 17 cents per share next year. What are the growth rates of the two stocks? Why is Wombat Ltd trading at a higher price even though it pays a smaller dividend?

b Two Government bonds A and B have a face value of $100 000 and pay coupons at the rate of 10% annually. Bond A has four years to maturity and bond B has eight years to maturity.

i If the interest rate rises to 12% p.a., what are the prices of the two bonds?

ii If the current interest rate is 7.5% p.a., what are the prices of the two bonds?

iii What observations in relation to the interest rate risk of investing in bonds can be made given the above results?

Reference no: EM13203989

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