Question

1. When you refer to a bond's coupon, you are referring to which one of the following?

a. The difference between the purchase price and the face value

b. Annual interest divided by the current bond price

c. The annual interest payment

d. The principal amount of the bond

2. Scarlett plans to invest $1,000 in a 3-year Certificate of Deposit that has a compound interest rate of 10%. How much total interest will Scarlett earn?

a. $121

b. $500

c. $331

d. $1,210

3. A company has a 6% required rate of return and a 2% dividend growth rate. The company's current year dividend is $5. What's the per share value (current price) of the stock?

a. $85

b. $255

c. $127.50

d. $125

Answer 1

Solution 1:

When you refer to a bond's coupon, you are referring to "The annual interest payment"

Hence option c is correct.

Solution 2:

Investment in certificate of deposit = $1,000

Interest rate = 10%

Period = 3 years

Total interest to be earned = P (!+r)^t - P = $1,000 (1 + 0.10) ^3 - $1,000 = $331

Hence option c is correct.

Solution 3:

Cost of equity = 6%

Dividend growth rate = 2%

Next expected dividend = $5 * 102% = $5.10

Cost of Equity = D1 / P0 + g

$5.10 / P0 + 0.02 = 0.06

Current price of stock (P0) = $5.10 / 0.04 = $127.50

Hence option c is correct.