Problem 5. ABC bonds are 10-year, 14% coupon bonds and currently have a rating of BBB. You expect big changes for the company over the next year, and you are certain that exactly one year from now the bonds will be rated AA. Use the table below to estimate your 1-year return if you buy the bonds today and sell them one year from now.

Rating

Average YTM

AA

4.50%

A

5.00%

BBB

6.00%

BB

8.50%

B

9.50%

Put your answer here _________________________________________________

Retirement Problem

To prepare for your retirement 30 years from now, you plan to save the following amounts each month over the next 30 years:

The interest rate is 6% APR

The appropriate FVFA is:

Years

Amount

FV at the end of the decade

1-10

$200

11-20

$900

21-30

$1,200

(1) Fill in the FV at the end of each decade in the table above.

(2) After 30 years, you are ready to retire. You move your savings to safer investments, which means you expect to earn only 3% APR per year during your retirement. You expect to live for 25 more years. How much could you withdraw every month and not run out of money for 25 years?

The correct PVFA for this calculation is:

Withdraw per month in retirement

(3) Suppose it is the end of year 20 and you are considering your financial plan as shown above. You still expect to retire 10 years from now, but you think that you will need a retirement income of $4,000 per month for 25 years after you retire. To meet that goal, you will have to adjust your savings in the last ten years. Fill in the following table:

A

How much do you need to have in the bank when you retire to be able to withdraw the desired amount per month for 25 years?

B

At the end of year 20, you have a lump sum amount in the bank (Hint: the FV at the end of the decade in the first table). How much will that be worth in 10 years?

C

How much money will you have to generate from your last 10 years of savings to reach your goal?

(Hint: This is the amount in Row A of this table the amount in Row B)

D

How much do you have to save per month over the last ten years before you retire to generate the extra savings amount?

(Hint: This is the amount in the row above divided by the appropriate FVFA)

Practice Exam in Class Spring 2019.docx Round all calculations to at least 4 decimals. Report your answers in dollar and cents (for example, 5100.12) and 4 decimals in percent (for example, 10.12%) NAME Stud ent Number Problem 1. You expect a stock to pay dividends of S1.30, 51.40, 51.65.51.95 and $2.60 over the next 5 years. You will receive the first dividend exactly 1 year from now. You expect the stock to sell for a price of S-40:55 five years from som If the required return is 12%, what is the price of the stock today? answer here Put your (h) What is the expected price next year? Put your here Problem 2. Consider a 10-yeur, 12% coupon bond that sells for $10.00. Answer the questions in the table below: Problem 3. BDS Corp just paid a dividend of 1.75 per share. You expect dividends to grow 15% per year for the next 3 years, 10% per year the year after that, and then grow at 4% per forever If the required return on this stack is 15%, what is the price today? Put your answer here (b) What is the expected price next year? Put your answer here Problem 4. The growth rate in the dividend payments of a manufacturing company is constant at-5% per year (The dividends are getting smaller). The stock just paida dividend of 4.25 per share. Investors require a return of 12% to invest in the company What is the price of a share of the stock today? Put your answer here (b) What is the expected price next year? Put your answer here (c) What is your rate of retum for a year investment in this stock? Put your answer here Problem 3. ABC bonds are 10 year, 14% coupon bonds and currently have anting of BBB. You expect big changes for the company over the next year, and you are certain that exactly one year from now the bonds will be rated AA. Le the table below to estimate your 1-year return if you buy the bonds today and sell them ce year from now Put your answer here Retirement Problem To prepare for your retirement 30 years from now you plan to save the following amounts cach month over the next 30 years: (b) What is the expected price next year? Put your answer here Problem 4 The growth rate in the dividend payments of a manufacturing company is constant at -5% per year The dividends are getting smaller). The stock just paida dividend of 4.25 per share. Investors require a return of 12% to invest in the company (a) What is the price of a share of the stock today? Put your answer here (b) What is the expected price next year? Put your answer here (e) What is your rate of return for a year investment in this stock? Put your answer here Problem 5. ABC bonds are 10 year, 14% coupon bonds and currently have a rating of BBB. You expect big changes for the company over the next year, and you are certain that exactly one year from now the bonds will be rated AA. Use the table below to estimate your 1-yeur return if you buy the bands today and sell theme year from now TI Put your answer here Retirement Problem To prepare for your retirement 30 years from now, you plan to save the following amounts cach month over the next 30 years (1) Fill in the FV at the end of each decade in the table above (2) After 30 years, you are ready to retire. You move your savings to safer investments wuch means you expect to earn only 39 APR per year during your retirement. You expect to live for 25 more years. How much could you withdraw every month and not run out of money for 25 years (3) Suppose it is the end of year 20 and you are considering your financial planas shown above. You still expect to retire 10 years from now, but you think that you will need a retirement income of $4,000 per month for 25 years after you retine. To meet that goal, you will have to adjust your savings in the last ten years. Fill in the following table