Question
1: Suppose that 4 years ago, the company invested $11,600 in a semiannual-pay bond with a 10-year maturity and a coupon rate of 8%. Since
1: Suppose that 4 years ago, the company invested $11,600 in a semiannual-pay bond with a 10-year maturity and a coupon rate of 8%. Since then, interest rates have increased and currently, a comparable 6-year bond has a coupon rate of 10%. i) Do you expect the bond the company bought, to be selling at a premium or at a discount? Why? ii) If the yield and coupon rates are monthly compounded, compute the current value of the bond the company bought 4 years ago.
2: The companys dividends are expected to grow at a 7% for the next 4 years. Dividends are expected then to grow at 5% indefinitely. If the required return is 12 percent and the company is expected to pay a dividend of $8.50 next period, what is the current share price?
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