Question
You want to buy a portfolio of financial securities consisting of three, $1,000 face value Government of Canada bonds and 500 preferred shares of Laurentide
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You want to buy a portfolio of financial securities consisting of three, $1,000 face value Government of Canada bonds and 500 preferred shares of Laurentide Resort Inc. Laurentide Resort has a preferred share series trading on the TSX. It pays a dividend of $0.56 semi- annually. The required rate of return on the stock is 12% compounded semi-annually. The bonds have 4 years to maturity and 8% semi-annual coupon. Currently, the yield to maturity on these bonds is 10% compounded semi-annually.
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a) What is the current intrinsic value of Laurentide Resorts preferred stock?
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b) What is the current price of the 4-year coupon bonds?
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c) What is the current value of your portfolio?
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d) It is now 2 years later. Market interest rates have dropped and the yield to maturity on
these bonds is now 8%. What is the value of the bonds at this time?
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e) It is still 2 years later and the yield to maturity has dropped to 8%. Assuming that the
price of Laurentide Resort Inc. is now $8.50, what is the expected annual rate of return on your portfolio over the 2 years from your investment?
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Thanks!
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