(1) A company has issued 7.5% coupon bonds that mature in 10 years. The bonds make annual payments. If the YTM on these bonds is 8.75%, what is the current bond price?

(2) Sams Inc. issued 11-year bonds a year ago at a coupon rate of 6.9%. The bonds make semiannual payments. If the YTM on these bonds is 7.4%, what is the current bond price?

(3) Both Bond Sam and Bond Dave have 9% coupons, make semiannual payments, and are priced at par value. Bond Sam has 3 years to maturity, whereas Bond Dave has 20 years to maturity. If interest rates suddenly rise by 2%, what is the percentage change in the price of Bond Sam? Of Bond Dave? If rates were suddenly fall by 2% instead, what would the percentage change in the price of Bond Sam be then? Of Bond Dave? Illustrate your answers by graphing bond prices versus YTM. What does this question tell you about the interest rate risk of longer-term bonds?

(4) (a) What is the relationship between the price of a bond and its YTM? (b) Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about for discount bonds? For bonds selling at par value? (c) What is the relationship between the current yield and YTM for premium bonds? For discount bonds? For bonds selling at par value?

(5) A company just paid a dividend of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 6% per year indefinitely. If investors require an 11% return on the stock, what is the current price? What will the price be in three years? In 15 years?

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