Homework 3

It covers chapter 7 and 8:

1. Suppose you buy a 2 year 5% bond that has a yield to maturity (YTM) of 6%. What is the price of the bond?

2. Suppose you buy a 30 year bond that pays a 6% coupon for the first 15 years and an 8% coupon for the last 15 years. The YTM of this bond is 7%. What is the price of the bond?

3. What is the YTM of a 5 year 8% bond that is currently selling for $1050?

4. What is the YTM of a 10 year 6% bond that is currently selling for $940?

5. What is the yield to call (YTC) of a 30 year 8% bond selling for $940? The call deferment period for the bond is 10 years?

6. Suppose you bought a 10 year 8% bond for $975. If you sold the bond for $940 after holding it for 2 years, what was your holding period yield?

7. ABC Company bonds, with current yield 12%, will mature after 10 years. The coupon rate of these bonds is 10%. Calculate their market price and the yield to maturity.

8. What should the price of the stock be if it pays dividend of $1 and the dividend will grow at a rate 5% thereafter and the required return 10%?

9. A stock sells for $18, it pays a dividend of $1, and the dividends compound annually at 6 percent. The required rate of return is 12 percent. What should the price of the stock be? Is it good to buy the stock?

10. You are considering a stock A that pays a dividend of $1. If A is selling for $10 a share, is it a good buy if you expect earnings and dividends to grow at 6%?