Question 1:

Eleanor Burns is attempting to find the normal interest rate for a security. She has gathered the following data:

Characteristic Security

Time to maturity 10 years

Inflation expectation premium 7.0%

Risk for premium:

Liquidity risk 1.1%

Default risk 1.1%

Maturity risk 1.1%

Other risk 1.3%

A. If the real rate of interest is currently 1%, find the risk-free rate of interest applicable to the security.

B. Find the total risk premium attributable to the security's issuer and issue characteristics.

C. Calculate the nominal rate of interest for the security.

Question 2:

Assume that the Financial Management Corporation's $1,000 par-value bond has a 7.600% coupon, matures on May 15, 2023, has a current price quote of 113.639 and a yield-to-maturity (YTM) of 7.201%.

A. What is the dollar price of the bond?

B. What is the bond's current yield?

C. Is the bond selling at par, at a discount, or at a premium?

D. Compare the bonds current yield to its YTM and explain why they differ.

Question 3:

Each of the bonds below pays interest annually. Calculate the YTM for each bond.

Bond | Par Value | Coupon interest rate | Years to maturity | Current value

A $1,000 9% 8 $820

B $1,000 12% 16 $1,000

C $500 12% 12 $560

D $1,000 15% 10 $1,120

E $1,000 5% 3 $900

Bond A:

Bond B:

Bond C:

Bond D:

Bond E:

Question 4:

The common stock of Denis and Denis Research Inc. trades for $60 per share. Investors expect the company to pay a $3.90 dividend next year, and they expect that dividend to grow at a constant rate forever.

If investors require a 10% return on this stock, what is the dividend growth rate that they are expecting?

Question 5:

Kelsey Drums, Inc. is a well-established supplier of the fine percussion instruments to orchestras all over the US. The company's class A common stock has paid a dividend of $7 per share for the last 20 years. Management expects to continue to pay that amount for the foreseeable future. Sally Talbot purchased 500 shares of Kelsey class A common 6 years ago at a time when the required rate of return was 14%. She wants to sell her shares today. The current required rate of return for the stock is 11%.

How much total capital gain or loss will Sally have on her shares?