Question

1) Suppose a​ ten-year, $1000 bond with an 8.2% coupon rate and semiannual coupons is trading for %1,035.49.

a. What is the​ bond's yield to maturity​ (expressed as an APR with semiannual​ compounding)?

b. If the​ bond's yield to maturity changes to 9.9% ​APR, what will be the​ bond's price?

2) Suppose a​ seven-year, $1,000 bond with an 8.2% coupon rate and semiannual coupons is trading with a yield to maturity of 6.63%.

a. If the yield to maturity of the bond rises to 7.11% ​(APR with semiannual​ compounding), what price will the bond trade​ for?​​ (Round to the nearest​ cent.

3) Suppose you purchase a​ 10-year bond with 6.7% annual coupons. You hold the bond for four​ years, and sell it immediately after receiving the fourth coupon. If the​ bond's yield to maturity was 4.6% when you purchased and sold the​ bond, What is the annual rate of return of your​ investment?

4) Suppose Acap Corporation will pay a dividend of $2.89 per share at the end of this year and $2.99 per share next year. You expect​ Acap's stock price to be $52.55

in two years. Assume that​ Acap's equity cost of capital is 10.7%.

a. What price would you be willing to pay for a share of Acap stock​ today, if you planned to hold the stock for two​ years?

b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able to sell a share of Acap stock in one​ year?

c. Given your answer in ​(b​), what price would you be willing to pay for a share of Acap stock today if you planned to hold the stock for one​ year? How does this compare to your answer in ​(a​)?

5) Laurel Enterprises expects earnings next year of ​$3.99 per share and has a 50% retention​ rate, which it plans to keep constant. Its equity cost of capital is 11%​, which is also its expected return on new investment. Its earnings are expected to grow forever at a rate of 5.5% per year. If its next dividend is due in one​ year, what do you estimate the​ firm's current stock price to​ be?

Answer 1

1)

a)

b)