Take intermediate calculations to four decimal places (e.g., 1.2345%) and show your final answer to two decimal places (e.g., $123.45 or 1.23%).

1.(a)Suppose a 10 percent coupon, $1,000 bond with ten years left to maturity is selling for $1,200.What is the yield, assuming that interest is paid semi-annually?(3 marks)

(b)Assume that the bond in (a) above pays interest quarterly.What would the bond sell for, given that the investor/market wants to earn the same effective yield as calculated in (a)?

(2 mark)

(c)Assume that the bond in (a) above pays interest monthly.What would the bond sell for, given that the investor/market wants to earn the same yield as calculated in (a)? (2 marks)

2.A firm has just issued a bond that has a face value of $1,000, a coupon rate of 8 percent paid semi-annually, and matures in 8 years.The bonds were issued at a discount ($950.35) with a yield to maturity of 8.88%.Assume that 3 years from now, the bond trades to earn an effective annual yield to maturity of 10%.At what price should this bond be trading for at the beginning of year 4?(4 marks)

3.(a)You are a stock analyst in charge of valuing high-technology firms, and you are expected to come out with buy-sell recommendations for your clients.You are currently analyzing a firm called etalk.com that specializes in internet-based communication.You are expecting explosive growth in this area.However, the company is not currently profitable even though you believe it will be in the future.Your projections are that the firm will pay no dividends for the next 3 years.Four years from now, you expect the stock to pay its first dividend of

$1 per share.You expect dividends to increase at a rate of 20 percent per year for three years after that.At that point, the industry will start to mature and growth willslow down; dividends will continue to grow at a rate of 10 percent per year for the foreseeable future.

The stock is trading on the Sauder Stock Exchange for $20 per share.If you believe that the required rate of return is 14 percent, what is your estimate of the value of the stock?Should you issue a recommendation to buy or to sell?(6 marks)

[Additional space is provided on the next page for your answer.]

(b)The day after you make your estimate in part (a), new information indicates that things are not going as smoothly as predicted for this business.Based on the new information, you have revised your estimates.You now estimate that the firm will pay its first dividend ($1) in 6 years.The high-growth period (20 percent per year) will last for two years before slowing to growth of 10 percent per year for the foreseeable future.

Given a required rate of return of 14 percent, what is your estimate of the value of the stock?Should you issue a recommendation to buy or to sell (assuming the stock is still trading for $20)?(3 marks)