Question

a. Lou Spence bought a stock seven years ago for $15.00 a share. If it is now selling for $42.39 a share, what is the stock’s compound annual growth rate? (No dividends were paid.) (Use a Financial calculator to arrive at the answers.)

Annual growth rate             %

b. A bond just purchased pays annual interest of 10 percent. In seven years it matures at its face value of $25,000.

What price was paid if current yields on a bond of this risk are 8.5 percent? (Use a Financial calculator to arrive at the answers. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Purchase price           $

Answer 1

a). Given that,

Price of a stock 7 years ago P = $15

Current price = $42.39

Compound annual growth rate = (final value/initial value)^(1/t) - 1

=> annual growth rate = (42.39/15)^(1/7) - 1 = 16%

Use following values on financial calculator,

FV = 42.39

PV = -15

N = 7

PMT = 0

compute for I/Y, we get I/Y = 16

So, annual growth rate = 16%

b). Given about a bond,

Face value = $25000

Coupon rate = 10% annual

So, annual coupon payment = 10% of 25000 = $2500

years to maturity = 7 years

Yield on the bond = 8.5%

Use following values on financial calculator

FV = 25000

PMT = 2500

N = 7

I/Y = 8.5

compute for PV, we get PV = -26919.44

So, current price of the bond = $26919.44