(a) A bond has 5 years remaining to maturity, pays annual coupons at a rate of 7%, has an annual yield-to-maturity of 8%, and a face value of $1,000.

Required: (i) What is the current price of the bond?

(ii) If market interest rates applicable to this type of bond are currently at 8% per year, would the price that you computed in (i) be a fair price to pay for the bond? Explain why.

(b) A stock will pay a dividend of $10 in one year and $11 in two years, and will be sold in two years for an estimated price of $120.

Required: (i) What amount should be paid for the stock if the appropriate discount rate is 9%?

(ii) How would the expected selling price of $120 in two years have been estimated?