Question

Please answer Questions 4 and 12 on page 89 of the textbook, and solve Problems 22 and 27 on page 91 of the textbook. Complete your answer in Word, Excel, or both.

4. For each of the following situations, identify whether a bond would be considered a premium bond, a discount bond, or a par bond.

1. A bond’s current market price is greater than its face value.

2. A bond’s coupon rate is equal to its yield to maturity.

3. A bond’s coupon rate is less than its required rate of return.

4. A bond’s coupon rate is less than its yield to maturity.

5. A bond’s coupon rate is greater than its yield to maturity

   12. A bond’s fair present value is less than its face value. What is the economic meaning of duration?

   22. A stock you are evaluating just paid an annual dividend of $2.50. Dividends have grown at a constant rate of 1.5 percent over the last 15 years and you expect this to continue.

   1. If the required rate of return on the stock is 12 percent, what is its fair present value?

   2. If the required rate of return on the stock is 15 percent, what should the fair value be four years from today?

   27. Consider a firm with a 9.5 percent growth rate of dividends expected in the future. The current year’s dividend was $1.32. What is the fair present value of the stock if the required rate of return is 13 percent?

Answer 1

4.

A bond’s current market price is greater than its face value. PREMIUM

A bond’s coupon rate is equal to its yield to maturity. PAR

A bond’s coupon rate is less than its required rate of return. DISCOUNT

A bond’s coupon rate is less than its yield to maturity. DISCOUNT

A bond’s coupon rate is greater than its yield to maturity PREMIUM

12.
TIME TAKEN TO RECOVER THE FAIR PRESENT VALUE

22.
If the required rate of return on the stock is 12 percent?
=2.5*1.015/(12%-1.5%)=$24.17

If the required rate of return on the stock is 15 percent?
=2.5*1.015^5/(12%-1.5%)=$25.65

27.
=1.32*(1+9.5%)/(13%-9.5%)=$41.30