Most of these problems do not require any calculations, although you can substitute your own numbers to fit the question. Stock questions use the equation for the Dividend Growth Model P0 = D1/(r g), where P0 is the stocks price, D1 is the next dividend, r is the investors required return, and g is the stocks dividend growth rate. Bond questions are focused on the relationship between the bonds coupon rate and yield to maturity and how that affects the bonds price.

5. (3 points) A bond with 8 years left until maturity has a coupon rate of 9%. Is the price an investor is willing to pay for this bond less than $1,000, $1,000 or more than $1,000 if he believes the yield to maturity is: a. 13% b. 8% c. 9%

6. (3 points) Three investors Wham, Bam and Sam are pricing the same bond, but Wham prices the bond at a discount, Bam at a premium, and Sam at Par. Rank each investor, from smallest to largest, in terms of the yield to maturity they think is appropriate for the bond.

7. (1 point) Five years ago a bond was priced at a premium. Since then, the yield to maturity for the bond has not changed. Is the price for that bond higher or lower today than it was five years ago?

8. (3 points) You are assigning a yield to maturity for a 12% coupon bond based on your expectations of future economic conditions. If economic conditions are bad, the bond should have a 15% yield to maturity; if economic conditions stay as they are, the bond should have a 13% yield to maturity; and if economic conditions are good, the bond should have a 9% yield to maturity. You think there is a 25% chance economic conditions will be bad, a 45% chance that they will stay as they are, and a 30% chance that they will be good. Based on this, do you price the bond at a discount, par or premium?