Question

PLEASE SHOW HOW TO SOLVE THE PROBLEMS! Will give you a good rating if done properly :)

1. Zero coupon bonds: Diane Carter is interested in buying a five-year zero coupon bond whose face value is $1,000. She understands that the market interest rate for similar investments is 9 percent. Assume annual coupon payments. What is the current value of this bond?

2. Zero coupon bonds: Ten-year zero coupon bonds issued by the U.S. Treasury have a face value of $1,000 and interested is compounded semiannually. If similar bonds in the market yield 10.5 percent, what is the value for these bonds?

3. Zero growth: Nynet, Inc., paid a dividend of $4.18 last year. The company does not expect to increase its dividend for the next several years. If the required rate of return is 18.5 percent, what is the current price of the stock?

4. Zero growth: Knight Supply Corp. has not grown for the past several years and expects this lack of of growth to continue. The firm last paid a dividend of $3.56. If you require a rate of return of 13 percent, what is the current stock price?

Answer 1

1)

Annual coupon (PMT) = 0

Face value of the bond (FV) = 1000

YTM of the bond (rate) = 9%

Numebr of years (nper) =5

Current Value of the bond (PV) = = $ 649.93

2)

Annual coupon (PMT) = 0

Face value of the bond (FV) = 1000

YTM of the bond (rate) = 10.5 %

Numebr of years (nper) =10

Current Value of the bond (PV) = = $ 368.45

3)

Dividend last year, D0 = $ 4.18

Growth in dividends , g = 0%

Required rate of return, k = 18.5%

Current Price of the stock = D0/(k) = 4.18/18.5% = $ 22.59

4)

Dividend last year, D0 = $ 3.56

Growth in dividends , g = 0%

Required rate of return, k = 13 %

Current Price of the stock = D0/(k) = 3.56/13 %= $ 27.38