What is the relationship between changes in interest rates

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Part (A)

Blue Horizons shares have just paid a dividend of $0.45 and are now selling for $12.04. Dividends are expected to increase by 8% pa for the next two years, 6% pa for the subsequent three years, after which they are expected to increase by a steady 4.5% pa. If you require a 9% return from these shares, would you invest in them? Why or why not?

Part (B)

2 years ago a firm issued 10 year $1,000 bonds with semi-annual coupons. At that time the market yield for the bonds was 8%, and the bonds were at par.

a. If the market yield for these bonds is now 6%pa, what is their current price?

b. In 3 years' time it is anticipated that the market yield will be 9%pa. What will the price be at that time?

c. i. What is the relationship between changes in interest rates and debenture (bond) values?

ii. How is this relationship affected by the time to maturity?

iii. How is this relationship affected by the coupon rate?

Reference no: EM132412439

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