Question

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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**

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