Principles of finance ANSWER NUMBERS 1 4, USING THE PART II STATEMENT Part II Bond and Stock Evaluation Thissection of thetest addressesthebond and stock valuation Robert Campbell and Carol Morris are senior vice presidents of the bank They are co directors of the bank s pension fund management division, with Campbell having responsibility for fixed income securities (primarily bonds) and Morris responsible for equity investments Campbell and Morris, who will make the actual presentation, have asked you to help them by answering the following questions How do you determine the value of a bond What is the value of a ten year, $1,000 par value bond with a 10 percent annual coupon if its required rate of return is 10 percent What would be the value of the 10 year bond described above, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13 percent return Is the security now a discount bond or a premium bond Whatistheyieldtomaturityona10 year,9percentannualcoupon,$1,000parvalue bond that sells for $887 00 That sells for $1,134 20 What does the fact that a bond sells at a discount or at a premium tell you about the relationship between required rate of return and the bond s coupon rate What is the difference between common stock and preferred stock What are some of the characteristics of each type of stock Write a formula that can be used to value any stocks, regardless of its dividend pattern What is its market value of an issue of preferred stock outstanding that pays stockholders a dividend equal to $10 each year, if the appropriate required rate of return for this stock is 8 percent What is the firm s current stock price of a constant growth company whose last dividend (D0, which was paid yesterday) was $2 00 and whose dividend is expected to grow indefinitely at a constant 6 percent annual rate, if the appropriate rate of return for thefirmsstock is16 percent

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Principles of finance. ANSWER NUMBERS 1-4, USING THE PART II STATEMENT Part II: Bond and Stock Evaluation. Thissection of thetest addressesthebond and stock valuation. Robert

Principles of finance. ANSWER NUMBERS 1-4, USING THE PART II STATEMENT

Part II: Bond and Stock Evaluation. Thissection of thetest addressesthebond and stock valuation. Robert Campbell and Carol Morris are senior vice presidents of the bank. They are co- directors of the bank s pension fund management division, with Campbell having responsibility for fixed income securities (primarily bonds) and Morris responsible for equity investments. Campbell and Morris, who will make the actual presentation, have asked you to help them by answering the following questions.

How do you determine the value of a bond? What is the value of a ten-year, $1,000 par value bond with a 10 percent annual coupon if its required rate of return is 10 percent? What would be the value of the 10-year bond described above, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13 percent return? Is the security now a discount bond or a premium bond?
Whatistheyieldtomaturityona10-year,9percentannualcoupon,$1,000parvalue bond that sells for $887.00? That sells for $1,134.20? What does the fact that a bond sells at a discount or at a premium tell you about the relationship between required rate of return and the bond s coupon rate?
What is the difference between common stock and preferred stock? What are some of the characteristics of each type of stock? Write a formula that can be used to value any stocks, regardless of its dividend pattern.
What is its market value of an issue of preferred stock outstanding that pays stockholders a dividend equal to $10 each year, if the appropriate required rate of return for this stock is 8 percent? What is the firm s current stock price of a constant growth company whose last dividend (D0, which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a constant 6 percent annual rate, if the appropriate rate of return for thefirmsstock is16 percent?