(1 - 3) Assume that you purchase a $1,000 inflation protected security that pays 5% annual interest. Assume that inflation is 3% in the first three

years.

(1) Calculate the amount of interest received in each of the first three years.

(2) Calculate the inflation adjustment received in each of the first three years.

(3) Calculate the inflation adjusted value of the TIP at the end of the first three years.

(4 - 6) Assume that you purchase a $1,000 inflation protected security that pays 2% annual interest. Assume that inflation is 1% the first year, 3% the second year and 2% in the third year.

(4) Calculate the amount of interest received in each of the first three years.

(5) Calculate the inflation adjustment received in each of the first three years.

(6) Calculate the inflation adjusted value of the TIP at the end of the first three years.

(7 - 9) You can invest in either a $1,000 par value corporate bond or municipal bond. The coupon rate on the corporate bond is 6.25% and the rate on the municipal bond is 5.25%. Assuming you are in a 28% federal tax bracket:

(7) Compute the after tax yield on the corporate bond.

(8) Compute the taxable equivalent yield on the municipal bond.

(9) Determine which investment you should select and explain your reasoning.

(10 - 14) A corporation buys $10 par value preferred stock of another corporation. The dividend payment is 4.5 percent of par. The corporation is in a 28 percent tax bracket and qualifies for a 70% dividend exclusion.

(10) Determine the annual pre-tax dividends.

(11) Determine the taxable amount of dividends.

(12) Determine the tax on the dividends.

(13) Determine the after-tax dividends.

(14) Determine the percent return on the company's investment.

(15 - 19) A corporation buys $1,000 par value bond issued by another corporation. The coupon rate is 6.0 percent of par. The corporation is in a 28 percent tax bracket and qualifies for a 70% dividend exclusion.

(15) Determine the annual pre-tax interest income.

(16) Determine the taxable amount of interest income.

(17) Determine the tax on the interest income.

(18) Determine the after-tax interest income.

(19) Determine the percent return on the company's investment.

(20 - 24) In each of the following cases, how many dollars of preferred dividends per share should be paid to preferred stockholders in the current period before any common dividends are paid?

Problem	Type	Par Value	Dividend	Arrears (Passed)
20	Non-Cumulative	50	3.00%	1
21	Cumulative	100	4.00%	3
22	Cumulative	80	2.00%	4
23	Non-Cumulative	40	3.50%	2
24	Cumulative	150	5.00%	3

(25) A firm has an outstanding preferred stock issue with a par value of $80 per share. The preferred stock pays an annual dividend at a rate of 6%. What is the most you pay for this stock given your required return is 12%?