1. Suppose that you invested $10,000 dollars using the dollar-cost-averaging approach. Assume that on Feb-1-10, and on Feb-1-11, you purchased $5,000 worth of stock (each year). You then held the shares until they were sold on Feb-1-2014 (assume you received the dividend in all these years and dividends were reinvested). What is the ROI on your investment over the holding period (4 years)? _______________ Hint: create a spreadsheet of your cash flows and solve for the IRR. Note: you only get the $1.20 dividend in 2011 on the shares purchased in 2010. Assume that you get the $1.70 dividend on shares purchased in 2014 just before you sold those shares.
2. The City of Ames issued a new series of bonds on Jan 1, 2009. The bonds were sold at par ($1,000), have a 2.5% annual coupon rate and mature in 10 years, on Jan 1, 2019. Coupon interest payments are made semi-annually (on June 30 and December 31).
(A) What was the Semi-Annual Current Yield of this bond on January 1, 2012 assuming that you just paid $888.00 for it? _________________
(B) Assuming that the level of interest rates had risen to 3.5%, what should be the price of the bond on January 1, 2011 (16 coupon payments left)? _________________
(C) On July 1, 2012, you purchased the bond for $950 (you purchased it just after the coupon payment was paid for June). What was the semi-annual Yield to Maturity (YTM) at that date (13 coupon payments left)? _________________