Reference no: EM132512096

Question 1. One of IBM's bond issues has an annual coupon rate of 4.2%, a face value of $1,000 and matures in 14 years.

1. What is the value (or price) of the bond if the required return is 5%?
2. What is the value of the bond if the required return is 6%?
3. What is the value of the bond if the required return is 7%?

Question 2. A corporate bond has 19 years to maturity, a face value of $1,000, a coupon rate of 5% and pays interest semiannually. The annual market interest rate for similar bonds is 3% and is quoted as a semi-annually compounded simple interest rate, i.e 1.5% per 6-month period. What is the price of the bond?

Question 3. You bought a 10-year zero-coupon bond with a face value of $1,000 and a yield to maturity of 2.7% (EAR). You keep the bond for 5 years before selling it.

1. What was the price of the bond when you bought it?
2. What is your personal 5-year rate of return if the yield to maturity is still 2.7% when you sell the bond? (i.e. what is your rate of return given what you sold it for at the end of year 5 and what you paid at year-0.)
3. What is your personal 5-year rate of return if the yield to maturity is 4.8% when you sell the bond? (i.e. what is your rate of return given what you sold it for at the end of year 5 and what you paid at year-0.)
4. What is your personal 5-year rate of return if the yield to maturity is 1.3% when you sell the bond?

Question 4. You bought a 10-year zero-coupon bond with a face value of $1,000 and a yield to maturity of 3.2% (EAR). You keep the bond for 5 years before selling it.

1. The price of the bond today is P0 = F/(1+r)T = 1000/1.03210 = 729.8
2. If the yield to maturity is still 3.2% when you sell the bond at the end of year-5, what is your personal annual rate of return?

Question 5. The University of California has two bonds outstanding. Both issues have the same credit rating, a face value of $1,000 and a coupon rate of 3%. Coupons are paid twice a year. Bond A matures in 1 year, while bond B matures in 30 years. The market interest rate for similar bonds is 11% (quoted as a semi-annual simple interest rate, so 5.5% per 6-month period).

a. What is the price of bond A?

b. What is the price of bond B?

c. Now assume that yields increase to 14%. What is the price of bond A?

d. What is now the price of bond B

Question 6. Pro Build Inc. has had a net income of $16 million in its most recent year. Net income is expected to grow by 3% per year. The firm always pays out 60% of net income as dividends and has 2 million shares of common stock outstanding. The required return is 10%. What is the current stock price?

Question 7. Forever 21 is expected to pay an annual dividend of $3.28 per share in one year, which is then expected to grow by 4% per year. The required rate of return is 14%. What is the current stock price?

Question 8. Samsung just paid an annual dividend of $3.3. The company has a required return of 10%.

1. If dividends are expected to be constant, what is the intrinsic value (fair price) of Samsung stock?
2. You now think that dividends will grow by 3% from year to year. What is the intrinsic value of Samsung stock?

Question 9. Walmart has just paid an annual dividend of $3.23. Dividends are expected to grow by 8% for the next 4 years, and then grow by 4% thereafter. Walmart has a required return of 9%. (Note the wording of this problem. Typically, when a problem says "expected to grow for the next X years", they mean that the the cashflow will grow constantly up to the end of year X, then the cashflow at year X will grow at some other rate in years X+1, X+2 etc.)

1. What is the expected dividend in four years?
2. What is the terminal value in four years (P4)?
3. What is the value of the stock now?