Finance Assignment
M101929
Assignment3.docxsubmitted in an Excel workbook
Be sure to show all work and/or use Excel formulas to demonstrate how you arrived at your answer.
Questions
5-1
· Define each of the following terms:
a. Bond; Treasury bond; corporate bond; municipal bond; foreign bond
b. Par value; maturity date; coupon payment; coupon interest rate
c. Floating-rate bond; zero coupon bond; original issue discount bond (OID)
d. Call provision; redeemable bond; sinking fund
e. Convertible bond; warrant; income bond; indexed bond (also called a purchasing power bond)
f. Premium bond; discount bond
g. Current yield (on a bond); yield to maturity (YTM); yield to call (YTC)
h. Indentures; mortgage bond; debenture; subordinated debenture
i. Development bond; municipal bond insurance; junk bond; investment-grade bond
j. Real risk-free rate of interest, r∗r*; nominal risk-free rate of interest, rRFrRF
k. Inflation premium (IP); default risk premium (DRP); liquidity; liquidity premium (LP)
l. Interest rate risk; maturity risk premium (MRP); reinvestment rate risk
m. Term structure of interest rates; yield curve
n. “Normal” yield curve; inverted (“abnormal”) yield curve
(5-2) “Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices.” Is this statement true or false? Explain.
(5-6). Maturity Risk Premium The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.3%. What is the maturity risk premium for the 2-year security? Intermediate Problems 7–20
(5-7). Bond Valuation with Semiannual Payments Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the bonds?
5-13). Yield to Maturity and Current Yield
· You just purchased a bond that matures in 5 years. The bond has a face value of $1,000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What is the bond’s yield to maturity?
(7-2). Constant Growth Valuation Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D1=$1.50D1=$1.50). The dividend is expected to grow at a constant rate of 6% a year. The required rate of return on the stock, rsrs, is 13%. What is the estimated value per share of Boehm’s stock?
(7-4). Preferred Stock Valuation
· Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock’s required rate of return (assume the market is in equilibrium with the required return equal to the expected return)?
(7-5). Nonconstant Growth Valuation
· A company currently pays a dividend of $2 per share (D0=$2)(D0=$2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, and then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price?
submitted in an Excel workbook
Be sure to show all work and/or use Excel formulas to demonstrate how you arrived at
your answer.
Questions
5
-
1
·
Define each of the following terms:
a.
Bond; Treasury bond; corporat
e bond; municipal bond; foreign bond
b.
Par value; maturity date; coupon payment; coupon interest rate
c.
Floating
-
rate bond; zero coupon bond; original issue discount bond (OID)
d.
Call provision; redeemable bond; sinking fund
e.
Convertible bond; warrant; income bon
d; indexed bond (also called a
purchasing power bond)
f.
Premium bond; discount bond
g.
Current yield (on a bond); yield to maturity (YTM); yield to call (YTC)
h.
Indentures; mortgage bond; debenture; subordinated debenture
i.
Development bond; municipal bond insuranc
e; junk bond; investment
-
grade
bond
j.
Real risk
-
free rate of interest,
r
*
r*
; nominal risk
-
free rate of interest,
r
RF
rRF
k.
Inflation premium (IP); default risk premium (DRP); liquidity; liquidity
premium (LP)
l.
Interest rate risk; maturity risk premium (MRP); rei
nvestment rate risk
m.
Term structure of interest rates; yield curve
n.
“Normal” yield curve; inverted (“abnormal”) yield curve
(5
-
2) “Short
-
term interest rates a
re more volatile than long
-
term interest rates, so short
-
term bond
prices are more sensitive to interest rate changes than are long
-
term bond prices.” Is this statement
true or false? Explain.
(5
-
6). Maturity Risk Premium The real risk
-
free rate is 3%, and inflation is
expected to be 3% for the
next 2 years. A 2
-
year Treasury security yields 6.3%. What is the maturity risk premium for the 2
-
year security? Intermediate Problems 7
–
20
(5
-
7). Bond Valuation with Semiannual Payments Renfro Rentals has issued bonds that have a
10%
coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and
a yield to maturity of 8.5%. What is the price of the bonds?
5
-
13).
Yield to Maturity and Current Yield
·
You just purchased a bond that matures in 5 years. The bond has a fa
ce value of
$1,000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What
is the bond’s yield to maturity?
submitted in an Excel workbook
Be sure to show all work and/or use Excel formulas to demonstrate how you arrived at
your answer.
Questions
5-1
Define each of the following terms:
a. Bond; Treasury bond; corporate bond; municipal bond; foreign bond
b. Par value; maturity date; coupon payment; coupon interest rate
c. Floating-rate bond; zero coupon bond; original issue discount bond (OID)
d. Call provision; redeemable bond; sinking fund
e. Convertible bond; warrant; income bond; indexed bond (also called a
purchasing power bond)
f. Premium bond; discount bond
g. Current yield (on a bond); yield to maturity (YTM); yield to call (YTC)
h. Indentures; mortgage bond; debenture; subordinated debenture
i. Development bond; municipal bond insurance; junk bond; investment-grade
bond
j. Real risk-free rate of interest, r
*
r*; nominal risk-free rate of interest, r
RF
rRF
k. Inflation premium (IP); default risk premium (DRP); liquidity; liquidity
premium (LP)
l. Interest rate risk; maturity risk premium (MRP); reinvestment rate risk
m. Term structure of interest rates; yield curve
n. “Normal” yield curve; inverted (“abnormal”) yield curve
(5-2) “Short-term interest rates are more volatile than long-term interest rates, so short-term bond
prices are more sensitive to interest rate changes than are long-term bond prices.” Is this statement
true or false? Explain.
(5-6). Maturity Risk Premium The real risk-free rate is 3%, and inflation is expected to be 3% for the
next 2 years. A 2-year Treasury security yields 6.3%. What is the maturity risk premium for the 2-
year security? Intermediate Problems 7–20
(5-7). Bond Valuation with Semiannual Payments Renfro Rentals has issued bonds that have a 10%
coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and
a yield to maturity of 8.5%. What is the price of the bonds?
5-13). Yield to Maturity and Current Yield
You just purchased a bond that matures in 5 years. The bond has a face value of
$1,000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What
is the bond’s yield to maturity?
