Question

PLEASE TRY TO ANSWER ALL OF THE NUMBERED QUESTIONS

1. How much would an investor earn on a stock purchased one year ago for $70 if it paid an annual cash dividend of $4.35 and had just been sold for $78.50? Would the investor have experienced a capital gain? Explain.

2. An investor buys a bond for $1,000. The bond pays $40 in interest every six months. After two years, the investor sells the bond for $980. Describe the types of income or loss the investor has.

4. Assume you purchase a bond for $870. The bond pays $25 interest every six months. You sell the bond after 18 months for $950. Calculate the following:
a. Income
b. Capital gain or loss
c. Total return in dollars and as a percentage of the original investment

Answer 1

1) Total return for investor =(Final Stock Price - Initial Stock Price + Cash Dividend) / Initial Stock Price = (78.5 - 70 + 4.35)/70 = 18.35%

Investor would have experienced a capital gain in terms of increased stock price. Hence, is capital gain would be 8.5.

2) Total return for investor = Selling Price of Bond + Total Interest Earned - Cost Price of Bond = 980 + 40 X 4 - 1000 = -40

Hence, the investor has earned a total of $40 loss.

4) a) Income = Selling Price of Bond + Total Interest Earned - Cost Price of Bond = 950 + 25 X 3 - 870 = 155

b) Capital gain is the rise of bond over the 18 months. Hence, capital gain = Selling Price of Bond - Cost Price of Bond = 80

c) Total return in dollar terms is $155. Total return as % is 155/870 = 17.81%.