Capital gain on investment, Financial Management

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a. Why do prices of low coupon bonds tend to fluctuate more than the prices of high coupon bonds? And why do prices of longer te$ to maturity bonds tend to fluctuate more than the prices of shorter te$ to maturity bonds?

b. What is a callable bond? Why is the importance of a sinking fund? Should the issuing company exercise the option to call the bond when the interest rate rises? Why or why not?

c. What is the value of a $1,000 zero coupon government bond that matures after eight years, if comparable yields are 7%?

d. A homeowner has been offered three alternative mortgage loans to finance the purchase of a $300,000 house. The interest rate on the first alternative is 8 percent for twenty-five years, and the loan requires a 20 percent down payment. The second mortgage loan is also for twenty-five years with an interest rate of 7 percent but requires a down payment of a third of the cost of the house. The third loan also requires a third down but is for 20 years at 6 percent. What are the annual mortgage payments required by each loan?

e. If you purchase a $5 preferred stock for $40 a share, what is the current yield? If you anticipate that yields will decline to 10 percent, what will be the anticipated capital gain on this investment?


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