Question 9
Continuing with question 8 above. Let's say that interest
rates stayed at 7% (didn't fall to 4%) and they will stay there for
at least the next 5 years. What would be the value of Carnival's
bonds in 2018?
Question 10
The Going to the Sun Highway in Glacier National Park -
located in northwestern Montana - is one of the most spectacular
drives in North America. Unfortunately the road needs to be
resurfaced due to many harsh winters. The State of Montana has
decided to sell state bonds to cover the needed repairs, A Montana
state savings bond can be converted to $2000 at maturity six years
from purchase. If the state bonds are to be competitive with U.S.
savings bonds, which pay 9% annual interest (compounded annually),
at what price must Montana sell its bonds? (Assume no cash payments
on savings bonds prior to redemption.)
Question 11
Risk & return is a classic item in finance. You would like
to estimate what the return on General Electric stock could be
given it's beta of 2. Other data you have collected: the rate of
return on 90 day T-Bills is 1.5%, on 5 year T-Notes it 4% and on
the "long bond", the 30-year T- Bond = 6.5%. The Prime is 8%, LIBOR
is 5.5% and the average return on the overall stock market is
estimated to be 8%.
OK again, what do you expect the rate of return on G.E.'s
stock to be?
Hint: note that term "beta" - there's a classic formula that
uses "beta"!
Question 8
BOND VALUATION - Ch 6 and pages OM 11-14: In 2014 Carnival
Cruise Lines decided to sell some new bonds (something about fixing
a big ship). They sold the bonds for $1,000 (face value) with a 20
year maturity and an 7% coupon. Two years have passed. Interest
rates on similar bonds have declined to 4%. If an owner attempts to
sell her/his Carnival bond bought for $1,000 in 2014, what should
they expect to receive for it in the
secondary market?