PART (A)

You own a bond that pays $100 in annual interest, with a $1,000 par value. It matures in 15 years. The market's required yield to maturity on a comparable-risk bond is 12 percent.

a. Calculate the value of the bond.

b. How does the value change if the Yield To Maturity on the bond

(i) increases to 15 percent

(ii) decreases to 8 percent?

c. Explain the implications of your answers in part b. as they relate to interest- rate risk, premium bonds and discount bonds.

PART (B)

Metro's stock price was at $100 per share when it announced that it would cut its dividends for next year from $10 per share to $6 per share, with the additional funds to be used for expansion. Prior to the dividend cut, Metro expected its dividends to grow at a 4 percent rate, but with the expansion, dividends are now expected to grow at 7 percent. How do you think the announcement will affect Metro's stock price?