Bond and Stock Evaluation.

Robert Campbell and Carol Morris are senior vice presidents of the bank. They are co- directors of the bank s pension fund management division, with Campbell having responsibility for fixed income securities (primarily bonds) and Morris responsible for equity investments. Campbell and Morris, who will make the actual presentation, have asked you to help them by answering the following questions.

What is the yield to maturity on a 10-year,9 percent annual coupon, $1,000 par value bond that sells for $887.00?

That sells for $1,134.20?

What does the fact that a bond sells at a discount or at a premium tell you about the relationship between required rate of return and the bond s coupon rate?

What is its market value of an issue of preferred stock outstanding that pays stockholders a dividend equal to $10 each year, if the appropriate required rate of return for this stock is 8 percent?

What is the firm s current stock price of a constant growth company whose last dividend (D0, which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a constant 6 percent annual rate, if the appropriate rate of return for the firm's stock is16 percent?