Question

8) Suppose a​ seven-year, $1,000 bond with a 10.96% coupon rate and semiannual coupons is trading...

8)

Suppose a​ seven-year, $1,000 bond with a 10.96% coupon rate and semiannual coupons is trading with a yield to maturity of 8.00%.

a. Is this bond currently trading at a​ discount, at​ par, or at a​ premuim? Explain.

b. If the yield to maturity of the bond rises to 8.73%

​(APR with semiannual​ compounding), at what price will the bond​ trade?

a. Is this bond currently trading at a​ discount, at​ par, or at a​ premuim? Explain.

The bond is currently trading...  ​(Select the best choice​ below.)

A.... at a premium because the coupon rate is greater than the yield to maturity

B.... at a discount because the coupon rate is greater than the yield to maturity

C.... at a premium because the yield to maturity is greater than the coupon rate.

D.... at par because the coupon rate is equal to the yield to maturity

9)

Assume​ Evco, Inc., has a current stock price of $56 and will pay a $2.25 dividend in one​ year; its equity cost of capital is 19%. What price must you expect Evco stock to sell for immediately after the firm pays the dividend in one year to justify its current​ price?

The expected price is $ ----------. (Round to the nearest​ cent.)

2)

Which do you​ prefer: a bank account that pays 8% per year​ (EAR) for three years​ or:

a. An account that pays 4% every six months for three​ years?                             

b. An account that pays 12% every 18 months for three​ years?                      

c. An account that pays 0.8% per month for three​ years?

a. An account that pays 4% every six months for three​ years?                     

If you deposit $1 into a bank account that pays 8% per year for three​ years, you will have

​$ ----------------. (Round to five decimal​ places.)

Homework Answers

Answer #1

8.

a.

The relationship between bond price and Yield to maturity is an inverse relationship. That is when YTM increases bond price decreases and when YTM decreases Bond price increases. Coupon rate of bond is 10.96% and YTM of bond is 8.00%. Since, Market return is less than coupon rate of bond, so price of bond is more than Par value. So, bond is trading at premium.

b.

If YTM of bond is 8.73%, so price of bond at 8.73% is calculated in excel and screen shot provided below:

Bond is trade at $1,114.99.

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