Question
4. a. Suppose a U.S. Treasury bill, maturing in one year, can be purchased today for $92,500. Assuming that the security is held until maturity,
4. a. Suppose a U.S. Treasury bill, maturing in one year, can be purchased today for $92,500. Assuming that the security is held until maturity, the investor will receive $100,000 (face amount) but no interest. Determine the rate of return on this investment. (Hints: Since period is one year in a (and b), there are numerous ways of calculating the percentage return, including TVM, equations, and holding period return (HPR).)
b. Suppose a National Telephone and Telegraph (NTT) Company bond, maturing in one year, can be purchased today for $975. Assuming that the bond is held until maturity, the investor will receive $1,000 (principal) plus 7 percent interest (that is, (0.07 $1,000) = $70). Determine the rate of return on this investment.
c. Determine the implied risk premium on NTT bonds. (Hint: Risk premium defined in Problem 3.) For C > Question 3 is below
Q3. Twin City Knitting (TCK) pays a current dividend of $2.20 and dividends are expected to grow at a rate of 7 percent annually in the foreseeable future. The beta of TCK is 1.2. If the risk-free rate is 9.2 percent and the market risk premium is 6 percent, at what price would you expect TCKs common stock to sell? (Hints: Market risk premium = expected market return risk-free rate. First calculate the required return and then determine price P0 from the equity return equation with dividends growing at a constant rate.)
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