Assume a corporation's bond has 10 years remaining until maturity. The bond has a $1,000 face value and a 6% coupon rate each year. Other investments meeting the same criteria must provide annual returns of at least 4%. Let's pretend the bond issues coupon payments quarterly.

If the bond were selling today, how much would it cost?

 

You must provide evidence of your methodology and/or calculations in order to get full credit. 

 

Take, for example, a company that pays out all of its profits to shareholders in the form of annual dividends. Dividend payments from the company are projected to increase by 8% annually over the following five years, until 2035. We anticipate perpetual annual growth of 4% for the company beginning in 2036.

Assume that stock market-like investments attract a return of 12% from investors. In addition, at the end of 2030, the company distributed a dividend of $10 per share.

 

If you had to acquire shares in the company right now, how much would you pay? You must provide evidence of your methodology and/or calculations in order to get full credit.

 

Think about a $1,000 zero-coupon bond that matures on December 31, 2040. This bond has a 5% yield to maturity and a term of 3 years. Required: Determine the cost of the zero-coupon debt as of December 31, 2040, as well as the interest paid and the remaining principle amount for each year from 2041 through 2043.

 

You must provide evidence of your methodology and/or calculations in order to get full credit.