Bond XYZ is a 5-year, $1,000 par value bond. It pays an 8% coupon with quarterly payments during its first year (you receive $20 per quarter for the first 4 quarters). For the remaining four years, this bond pays a 12% coupon with quarterly payments (you receive $30 a quarter for the next 16 quarters). (a) The yield to maturity of bond XYZ is currently at a nominal rate of 8%. What is the current price of bond XYZ? (4 marks) (6) Bond XYZ was purchased at the price calculated in part (a) and held for investment for 1 year. At the end of the investment period, its yield to maturity (for the remaining 4 years) falls to a nominal rate of 6%. Calculate the realized capital gain yield over this 1-year investment period (Hint: it is (P1-P.)/P.). (6 marks) (TOTAL: 10 marks) Question 4 You are considering investing $100,000 in 2 stocks: Madule Corp and Imma Inc. Madule Corp just paid a dividend of $0.50 per share, and its dividend is expected to grow at a constant rate of 5.50% per year forever. Imma Inc. just paid a dividend of $0.75 per share, and its dividend is expected to grow at a constant rate of 6% per year forever. Madule and Imma's betas are 1.4 and 1.15, respectively. The market risk premium is 5%, and the risk-free rate is 4.00%. (a) What is Madule's current stock price and Imma's current stock price? (8 marks) (b) How much will you have to invest in each stock so that your portfolio beta is 1.2? Bond XYZ is a 5-year, $1,000 par value bond. It pays an 8% coupon with quarterly payments during its first year (you receive $20 per quarter for the first 4 quarters). For the remaining four years, this bond pays a 12% coupon with quarterly payments (you receive $30 a quarter for the next 16 quarters). (a) The yield to maturity of bond XYZ is currently at a nominal rate of 8%. What is the current price of bond XYZ? (4 marks) (6) Bond XYZ was purchased at the price calculated in part (a) and held for investment for 1 year. At the end of the investment period, its yield to maturity (for the remaining 4 years) falls to a nominal rate of 6%. Calculate the realized capital gain yield over this 1-year investment period (Hint: it is (P1-P.)/P.). (6 marks) (TOTAL: 10 marks) Question 4 You are considering investing $100,000 in 2 stocks: Madule Corp and Imma Inc. Madule Corp just paid a dividend of $0.50 per share, and its dividend is expected to grow at a constant rate of 5.50% per year forever. Imma Inc. just paid a dividend of $0.75 per share, and its dividend is expected to grow at a constant rate of 6% per year forever. Madule and Imma's betas are 1.4 and 1.15, respectively. The market risk premium is 5%, and the risk-free rate is 4.00%. (a) What is Madule's current stock price and Imma's current stock price? (8 marks) (b) How much will you have to invest in each stock so that your portfolio beta is 1.2
