Question

1. Frances is considering a 10 year bond with a face value of $100 which pays an annual coupon payment of $1. What price should she pay for it if comparable investments return 3%?

2. If she can buy the bond for $92 what would be the yield to maturity?

3. In the example above, further investigation reveals that the constant dividend pattern will not actually emerge until four years’ time. The dividend expected in the next year is only expected to be 20% of the anticipated eventual constant dividend ($4). The dividend the following year will be 50% of the anticipated eventual constant dividend ($4 ). The dividend in the third year from new will be 80% of the anticipated eventual constant dividend ($4). What would be the expected price under these conditions?

4. Mary has just inherited a parcel of shares. She anticipates an annual dividend of $390. She is thinking of selling the shares in 10 years’ time and estimates that they will be worth $22,000 by then. If comparable investments are returning 3.30% pa, what is the value of her inheritance in today’s dollars?

5. Martha has just changed jobs and has received a termination payment of $22,000 from her old employer. She has decided to invest it into a retirement scheme that promises to pay 3.30 % pa interest, compounded monthly. She is also committing herself to pay $390 per month into the scheme at the end of each month till she retires in forty years’ time. What will her retirement investment be worth then?

6. Andrew is considering an investment that he estimates may provide returns of 2.6%, 7.7%, or 10.3% depending on the future market conditions. He estimates the probabilities of those outcomes as 15%, 15%, & 70]% respectively. What is his expected probably return?

7. What is the variance of the returns in the investment Andrew is considering?

8. What is the standard deviation of the investment returns Andrew is considering?

Answer 1

In the question face value and coupon rate is given which Frances will get over the period of 10 years. So, price she must pay can be arrived at by finding present value of these cash flows she will get over the period of 10 years.