Question

1. What is the relationship between bond price and bond yield?

a. Bond price is inversely related to its yield.

b. Bond price is positively related to its yield.

c. Bond price reacts to its yield differently depending on whether it is a premium or discount bond.

d. Bond price is not directly related to its yield.

2. The next dividend payment by Hot Wings, Inc., will be $2.65 per share. The dividends are anticipated to maintain a 3 percent growth rate forever. If the stock currently sells for $42 per share, what is the required return?

a. 9.31%

b. 6.31%

c. 3.00%

d. 3.31%

3. Gecko Corp. is planning to pay an annual dividend of $2.08 a share on their common stock for the next period. The company adheres to a constant rate of growth dividend policy and offers a 4% growth rate in dividends. What will one share of common stock be worth ten years from now if the discount rate is 8 percent?

a. $74.01

b. $80.05

c. $59.85

d. $76.97

e. $71.16

Answer 1

1. The correct answer is option A.

Reason : The yield is the rate at which cashflows of a bond are equal to its market price. Now during inflation periods (when expectations of investor rises) the cost of investor rises because of which the yield also rises and thus the price of bond falls down and vice-versa in case inflations comes down.

2. The correct answer is option A i.e. 9.31%

As per constant growth model :

P0 = D1/(Ke - g)

Where,

P0 = Current Market Price

D1 = Dividend to be paid next year

Ke = Cost of capital

g = Growth rate

42 = 2.65/(Ke - 3%)

= 9.31%

(c). The correct will be option D i.e. $76.97

The Dividend payable by the company after 10 years will be 2.08*(1+4%)10

= $3.0789

Now using the same formula as above the price of share after 10 years will be :

3.0789/(8% - 4%)

= $76.97