Question
1.You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year
1.You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.90 percent. Your broker has determined the following information about economic activity and the corporation bonds:
Real interest rate = 3.20%
Default risk premium = 3.15%
Liquidity risk premium = 1.40%
Maturity risk premium = 2.90%
What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?
2.You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 5.10 percent. Your broker has determined the following information about economic activity and the corporation bonds:
Real interest rate = 4.30%
Default risk premium = 2.85%
Liquidity risk premium = .55%
Maturity risk premium = 2.60%
What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?
3.Consider the following three bond quotes; a Treasury note quoted at 102:18, and a corporate bond quoted at 98.85, and a municipal bond quoted at 103.05. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?
4.Consider a firm that had been priced using a 11.00 percent growth rate and a 16.00 percent required rate. The firm recently paid a $1.50 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 13.00 percent rate. How much should the stock price change (in dollars and percentage)?
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