ANSWER THE FOLLOWING QUESTIONS CORRECTLY

1. (Bond valuation) You are examining three bonds with a par value of $1,000 (you received $1,000 at maturity) and are concerned with that would happen to their market value if interest rates (or the market discount rate) changed. The three bonds are
   
   Bond A –a bond with 3 years left to maturity that has 10 percent annual coupon interest rate, but the interest is paid semiannually.
   
   Bond B –a bond with 7 years left to maturity that has 10 percent annual coupon interest rate, but the interest is paid semiannually.
   
   Bond C –a bond with 20 years left to maturity that has 10 percent annual coupon interest rate, but the interest is paid semiannually.
   
   What would be the value of these bonds if the market discount rate were

a.     10 percent per year compounded semiannually?

b.     4 percent per year compounded semiannually?

c.     16 percent per year compounded semiannually?

d.     What observations can you make about these results?

2. (Preferred stock expected return) You are planning to purchase 100 shares of preferred stock and must choose between Stock A and stock B. Stock A pays an annual dividend of $4.50 and is currently selling for $35. Stock B pays an annual dividend of $4.25 and is selling for $36. If your required return is 12 percent, which stock should you choose?

3. (Common stock valuation) Bates Inc. pays a dividend of $1 and is currently selling for $32.50. If investors require a 12 percent return on their investment from buying Bates stock, what growth rate Bates would Bates Inc. have to provide to investors?