BOND PROBLEM SOLUTIONS 1.

Six years ago, The Corzine Company sold a 20-year bond issue with a 14 per ent annual oupon rate and a ! per ent all premium. Today, Corzine alled the bonds. The bonds originally were sold at their "a e #alue o" $1,000. Compute the realized rate o" return "or in#estors who pur hased the bonds when they were issued and who surrender them today in ex hange "or the all pri e. PV = 1000; N = 6; PMT = 140; FV = 1090; CPT I/Y I/Y = 15.02% 2. %ou &ust pur hased a bond whi h matures in ' years. The bond has a "a e #alue o" $1,000, and has an ( per ent annual oupon. The bond has a urrent yield o" (.21 per ent. )hat is the bond*s yield to maturity+ CURRENT YIELD = ANNUAL COUPON PV 0.0 21 = 0 PV PV = 0 0.0 21 = 9!4.42 N = 5; PMT = 0; FV=1000; PV = 9!4.42 CPT I/Y I/Y = .65% ,. The -ass Company*s bonds ha#e 4 years remaining to maturity. .nterest is paid annually/ the bonds ha#e a $1,000 par #alue/ and the oupon interest rate is ! per ent. )hat is the yield to maturity at a urrent mar0et pri e o" $(2!+ )ould you pay $(2! "or one o" these bonds i" you thought that the appropriate rate o" return was 12 per ent+ PV = 29; N = 4; FV = 1000; PMT =90; CPT I/Y I/Y = 14.99% YES" IF YOU T#OU$#T T#E APPROPRIATE RATE %AS 12%" YOUR PV %OULD ACTUALLY BE #I$#ER MEANIN$ YOU %OULD BE %ILLIN$ TO PAY MORE T#AN & 29. 4. Sitel .n . has a bond whi h matures in 1 years and urrently sells "or $1,020. The bond has a "a e #alue o" $1,000 and a yield to maturity o" 10.'((, per ent. The bond pays oupons semiannually. )hat is the bond*s urrent yield+ CURRENT YIELD = ANNUAL COUPON PV FV = 1000; PV = 1020; I/Y = 10.55 ' 2 = 5.2942; N = 14; CPT PMT PMT = &55 ANNUAL COUPON = 55(2 =110 CURRENT YIELD = 110 1020 = 10.! % '. 2oo0 up the pri es o" 3T4T bonds in the Wall Street Journal. ." 3T4T were to sell a new issue o" $1,000 par #alue long-term bonds, approximately what oupon interest rate would it ha#e to set on the bonds i" it wanted to bring them out at par+

STOC) PROBLEM SOLUTIONS 1. 3 sto 0 is trading at $(0 per share. The sto 0 is expe ted to ha#e a year-end di#idend o" $4 per share whi h is expe ted to grow at some onstant rate g throughout time. The sto 0*s re5uired rate o" return is 14 per ent. ." you are an analyst who belie#es in e""i ient mar0ets, what would be your "ore ast o" g+ P0 = & 0; *1 =&4; + = 14% + = ,*1 P0- . / / = + 0 ,*1 P0- = 0.14 0 ,4 0- = 0.14 0 0.05 = 0.09 = 9% 2. )hat will be the nominal rate o" return on a pre"erred sto 0 with a $100 par #alue, a stated di#idend o" ( per ent o" par, and a urrent mar0et pri e o" $140+ P=D+ D = % 1 100 = & + = D P = 140 = 0.05!1 = 5.!1% ,. 6i rote h Corporation is expanding rapidly, and it urrently needs to retain all o" its earnings, hen e it does not pay any di#idends. 7owe#er, in#estors expe t 6i rote h to begin paying di#idends, with the "irst di#idend o" $1.00 oming , years "rom today. The di#idend should grow rapidly 8 at a rate o" '0 per ent per year 8 during %ears 4 and '. 3"ter %ear ', the ompany should grow at a onstant rate o" ( per ent per year. ." the re5uired return on the sto 0 is 1' per ent, what is the #alue o" the sto 0 today+ D' = 1.00 D4 =1.00 ,1.50- = 1.50 D5 = 1.50 ,1.50- = 2.25 C234567 D6 = 2.25 ,1.0 - = 2.4' 8596 62 597 :2; <2=96>=6 /;2?6@ 32*7A ,DVM- :2; B>A5C=/ *CBC*7=*9 :;23 D7>; 6 62 C=:C=C6D. P5 = D6 ,+0/- = 2.4' ,0.15 0 0.0 - = '4.!1 U9C=/ 6@7 <>9@ :A2? ?2;+9@776E CF0 = 0 CF1 = 0 F01 = 2 C02 = 1.00 C0' = 1.50 C04 = 2.25 . '4.!1 = '6.96 NPV I = 15 NPV = &19. 9 4. %ou buy a share o" The 9u Corporation sto 0 "or $21.40. %ou expe t it to pay di#idends o" $1.01, $1.144!, and $1.2240 in %ears 1, 2, and ,, respe ti#ely, and you expe t to sell it at a

pri e o" $2:.22 at the end o" , years. Cal ulate the growth rate in di#idends. Cal ulate the expe ted di#idend yield. )hat is this sto 0*s expe ted total rate o" return+ P0 = 21.40 D1 = 1.0! D2 =1.1449
D' = 1.2240 P' = 26.22 $;2?6@ ;>67 C= *CBC*7=*9E PV= 1.0!; FV = 1.2240; N = 2; CPT I/Y; ;25=* 62 !%. DCBC*7=* DC7A* = ,*1 P0- = 1.0! 21.40 = 0.05 T26>A ;765;= = !% . 5% = 12% I/Y = 6.9544% L76F9