Valuing BondsIntroduction

In this assignment, you will learn about bonds and the financial terms used in bond markets. In addition, you will differentiate between discount and premium bonds, identify the factors that influence bond value, and learn how the TVM concept is used to price bonds.

Instructions

Answer the following questions and complete the following problems, as applicable.

You may solve the following problems algebraically, or you may use a financial calculator or Excel spreadsheet. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values. If you use an Excel spreadsheet, show your input values and formulas.

Note:In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.

• Question 1:
  • Proficient-level: "What does a call provision [call feature] allow [bond] issuers to do, and why would they do it?" (Cornett, Adair, & Nofsinger, 2016. p. 184).
  • Distinguished-level: State what additional compensation is paid, in addition to the bond principal, when a bond is called.
• Question 2:
  • Proficient-level: "Provide the definitions of a discount bond and premium bond. Give examples" (Cornett, Adair, & Nofsinger, 2016, p. 184).
  • Distinguished-level: Explain why market interest changes are reflected in bond prices.
• Question 3:
  • Proficient-level: "Describe the differences in interest payments and bond prices between a 5 percent coupon bond and a zero coupon bond" (Cornett, Adair, & Nofsinger, 2016, p. 184).
  • Distinguished-level: Given a change in market interest rates, determine which of the two bonds would remain closer to its par value.
• Question 4:
  • Proficient-level: "Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 3.8 percent" (Cornett, Adair, & Nofsinger, 2016, p. 185).
    • Assume semi-annual compounding.
  • Distinguished-level: State why zero coupon bonds are sold at steep discounts.
• Question 5:
  • Proficient-level: "Compute the price of a 3.8 percent coupon bond with 18 years left to maturity and a market interest rate of 6.8 percent" (Cornett, Adair, & Nofsinger, 2016).
    • Assume interest payments are paid semi-annually, and solve using semi-annual compounding.
  • Distinguished-level: Explain why the bond is either a discount bond or a premium bond.
• Question 6:
  • Proficient-level: "A 5.65 percent coupon bond with 18 years left to maturity is offered for sale at $1,035.25. What yield to maturity [interest rate] is the bond offering?" (Cornett, Adair, & Nofsinger, 2016, p. 186).
    • Assume interest payments are paid semi-annually, and solve using semi-annual compounding.
  • Distinguished-level: Explain what effect a decrease in the offered sales price would have on the yield to maturity.

Submit your completed assignment as an attachment in the assignment area. You may use either a Word document or an Excel spreadsheet for your work, but not both. Prior to submitting your assignment, review the Valuing Bonds Scoring Guide to ensure you have met all of the requirements and as a self-assessment of your work.

PART 2:

Valuing StocksIntroduction

Companies can raise money through common stocks. Investors buy stocks and get the benefits of ownership of a firm. How to price stocks is the main objective of this assignment, in which you will learn about the differences between common and preferred stocks, the different stock valuation models, and the major stock market indexes.

Instructions

Answer the following questions and complete the following problems, as applicable:

You may solve the following problems algebraically, or you may use a financial calculator or Excel spreadsheet. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values. If you use an Excel spreadsheet, show your input values and formulas.

Note:In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.

• Question 1:
  • Proficient-level: "As owners, what rights and advantages do shareholders obtain" (Cornett, Adair, & Nofsinger, 2016, p. 211)?
  • Distinguished-level: Describe the disadvantages to owning stock.
• Question 2:
  • Proficient-level: "Why might the Standard and Poor's 500 Index be a better measure of stock market performance than the Dow Jones Industrial Average?" (Cornett, Adair, & Nofsinger, 2016, p. 211).
  • Distinguished-level: Explain how the Dow Jones Industrial Average is more popular than the Standard and Poor's 500.
• Question 3:
  • Proficient-level: "What are the differences between common stock and preferred stock?" (Cornett, Adair, & Nofsinger, 2016, p. 211).
  • Distinguished-level: Describe the similarities between common stock and preferred stock.
• Question 4:
  • Proficient-level: "On May 19, 2015, the Dow Jones Industrial Average set a new high. The index closed at 18,312.39, which was up 13.51 points from the previous day's close of 18,298.88. What was the return (in percent to four decimal places) of the stock market for May 19, 2015?" (Cornett, Adair, & Nofsinger, 2016).
  • Distinguished-level: Identify the three most recognized U.S. market indexes.
• Question 5:
  • Proficient-level: "At your brokerage firm, it costs $9.50 per stock trade. How much money do you need to buy 300 shares of Time Warner, Inc. (TWX), which trades at $22.62?" (Cornett, Adair, & Nofsinger, 2016).
  • Distinguished-level: Based on the amount of commission paid, state whether a traditional full-service broker or a discount broker is being used.
• Question 6:
  • Proficient-level: "Financial analysts forecast Safeco Corporation (SAF) growth for the future to be a constant 8 percent. Safeco's recent dividend was $0.88. What is the value of Safeco stock when the required return is 12 percent?" (Cornett, Adair, & Nofsinger, 2016, p. 213).
  • Distinguished-level: Re-calculate the value of stock, assuming a one percent increase in the growth rate.
• Question 7:
  • Proficient-level: "A preferred stock from Duquesne Light Company (DQUPRA) pays $3.55 in annual dividends. If the required return on the preferred stock is 6.7 percent, what is the value of the stock?" (Cornett, Adair, & Nofsinger, 2016, p. 213).
  • Distinguished-level: Explain why the growth rate of preferred stock is 0%.
• Question 8:
  • Proficient-level: Ultra Petroleum (UPL) has earnings per share of $1.56 and a P/E ratio of 32.48. What is the stock price?" (Cornett, Adair, & Nofsinger, 2016, p. 213).
  • Distinguished-level: Explain how the P/E model computes what is referred to as the stock's relative value.

Submit your completed assignment as an attachment in the assignment area. You may use either a Word document or an Excel spreadsheet for your work, but not both. Prior to submitting your assignment, review the Valuing Stocks Scoring Guide to ensure you have met all of the requirements and as a self-assessment of your work.