1. Bond X is a premium bond making annual payments. The bond pays an 8 percent coupon, has a YTM of 6 percent, and has 13 years to maturity. Bond Y is a discount bond making annual payments. This bond pays a 6 percent coupon, has a YTM of 8 percent, and also has 13 years to maturity. If interest rates remain unchanged, what do you expect the price of these bonds to be one year from now? In three years? In eight years? In 12 years? In 13

years? Whats going on here? Illustrate your answers by graphing bond prices versus time to maturity.

2. Both Bond Twain and Bond Brooks have 6 percent coupons, make semiannual payments, and are priced at par value. Bond Twain has 2 years to maturity, whereas Bond Brooks has 15 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Twain? Of Bond Brooks? If rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Bond Twain be then? Of Bond Brooks? Illustrate your answers by graphing bond prices versus YTM. What does this problem tell you about the interest rate risk of longer-term bonds?

Question 6

1. What is the relationship between the price of a bond and its YTM?

2. Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about for discount bonds? For bonds selling at par value?

3. What is the relationship between the current yield and YTM for premium bonds? For discount bonds? For bonds selling at par value?

4. The Back Street Girls Corporation has two different bonds currently outstanding. Bond M has a face value of GH20,000 and matures in 20 years. The bond makes no payments for the first six years, then pays GH1,000 every six months over the subsequent eight years, and finally pays GH1,750 every six months over the last six years. Bond N also has a face value of GH20,000 and a maturity of 20 years; it makes no coupon payments over the life of the bond. If the required return on both these bonds is 14 percent compounded semiannually, what is the current price of Bond M? Of Bond N?

Question 7

1. Smashed Pumpkin Farms (SPF) just paid a dividend of GH4.50 on its stock. The growth rate in dividends is expected to be a constant 7.5 percent per year, indefinitely. Investors require a 20 percent return on the stock for the first three years, an 11 percent return for the next three years, and then a 12 percent return, thereafter. What is the current share price for SPF stock?

2. Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next five years, because the firm needs to plough back its earnings to fuel growth. The company will pay a GH6 per share dividend in six years and will increase the dividend by 5 percent per year, thereafter. If the required return on this stock is 21 percent, what is the current share price?

3. South Park Corporation is expected to pay the following dividends over the next four years: GH4.75, GH3, GH2, and GH1. Afterwards, the company pledges to maintain a constant 9 percent growth rate in dividends, forever. If the required return on the stock is 16 percent, what is the current share price?

4. Mega Growth Co. is growing quickly. Dividends are expected to grow at a 30 percent rate for the next three years, with the growth rate falling off to a constant 7 percent, thereafter. If the

required return is 21 percent and the company just paid a GH1.50 dividend, what is the current share price?

5. Janicek Corp. is experiencing rapid growth. Dividends are expected to grow at 20 percent per year during the next three years, 15 percent over the following year, and then 10 percent per year, indefinitely. The required return on this stock is 15 percent, and the stock currently sells for GH50.00 per share. What is the projected dividend for the coming year?