1. A bond pays a $100 annual coupon and it matures in 4 years. If investors require a 10% return on this investment, what is the bond's price? $311.98???
2. A bond pays a $100 annual coupon in two $50 semiannual installments. The bond matures in 4 years. If investors require an annual return of 10% on this bond also, should its price be higher than, lower than, or identical to the price of the bond in 4-8 (above). Use Equation 4.3 and let r=.10. What price do you obtain? Can you explain the apparent paradox? Equation 4.3 is Price=(C/2)/(1 + r/2) + (C/2)/(1 + r/2) squared + .... + (C/2) + 1000/(1 + r/2) 2N
3. 10 Two bonds offer a 5% coupon rate, paid annually, and sell at par($1000). One bond matures in 2 years and the other matures in 10 years. a. What are the YTMs on each bond? b. If the YTM changes to 4%, then what happens to the price of each bond? c. What happens if the YTM changes to 6%.
4. One year from today, investors anticipate that the stock of Groningen Distilleries, Inc., will pay a dividend of $3.23 per share. After that, investors believe that the dividend will grow at 20% per year for 3 years before settling down to a long-run growth rate of 4%. The required rate of return on the stock is 15%. What is the current stock price?