Need done by Friday afternoon

6-2 Determinants of Interest Rates for Individual Securities You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that one-year T-bills are currently earning 1.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real risk-free rate = 0.75% Default risk premium = 1.15% Liquidity risk premium = 0.50% Maturity risk premium = 1.75% a. What is the inflation premium? (LG6-6) b. What is the fair interest rate on Moore Corporation 30-year bonds? (LG6-6)

6-14 Determinants of Interest Rates for Individual Securities NikkiG’s Corporation’s 10-year bonds are currently yielding a return of 6.05 percent. The expected inflation premium is 1.00 percent annually and the real risk-free rate is expected to be 2.10 percent annually over the next 10 years. The liquidity risk premium on NikkiG’s bonds is 0.25 percent. The maturity risk premium is 0.10 percent on two-year securities and increases by 0.05 percent for each additional year to maturity.

6-16 Unbiased Expectations Theory the Wall Street Journal reports that the rate on four-year Treasury securities is 1.60 percent and the rate on five-year Treasury securities is 2.15 percent. According to the unbiased expectations theory, what does the market expect?

6-18 Liquidity Premium Theory Suppose we observe the following rates: 1R1 = 0.75%, 1R2 = 1.20%, and E (2r1) = 0.907%. If the liquidity premium theory of the term structure of

6-22 Determinants of Interest Rates for Individual Securities the Wall Street Journal reports that the current rate on 8-year Treasury bonds is 5.85 percent, the rate on 15-year Treasury bonds is 6.25 percent, and the rate on a 15-year corporate bond issued by MHM Corp. is 7.35 percent. Assume that the maturity risk premium is zero. If the default risk premium and liquidity risk premium on an 8-year corporate bond issued by MHM Corp. are the same as those on the 15-year corporate bond,

6-26 Unbiased Expectations Theory the Wall Street Journal reports that the rate on three-year Treasury securities is 1.20 percent and the rate on five-year Treasury securities is 2.15 percent. According to the unbiased expectations theory, what does the market expect?

Research it! Spreads

Go to the Federal Reserve Bank of Saint Louis’ website at fred.stlouisfed.org and get the latest rates on 10-year T-bills and AAA and BAA rated corporate bonds using the following steps. Go to the Federal Reserve Bank of Saint Louis’ website at fred.stlouisfed.org. Search for “10-Year Treasury Constant Maturity Rate.” Choose monthly data. This will bring the file onto your computer that contains the relevant data. Search for “AAA Corporate” and then on “BAA,” choose monthly data. This will bring the file onto your computer that contains the relevant data. Calculate the current spread of AAA and BAA rated bonds over the 10-year Treasury bond rate. How have these spreads changed over the last two years? Integrated mini-case: Calculating Interest Rates

7-8 TIPS Interest and Par Value a 3⅛ percent TIPS has an original reference CPI of 180.5. If the current CPI is 206.8, what is the current interest payment and par value of the TIPS? (LG7-2)

7-12 Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in 15 years if the market interest rate is 5.75 percent. (LG7-4)

7-16 Taxable Equivalent Yield What’s the taxable equivalent yield on a municipal bond with a yield to maturity of 2.9 percent for an investor in the 28 percent marginal tax bracket? (LG7-6)

7-20 TIPS Capital Return Consider a 2.25 percent TIPS with an issue CPI reference of 187.2. At the beginning of this year, the CPI was 197.1 and was at 203.8 at the end of the year. What was the capital gain of the TIPS in dollars and in percentage terms? (LG7-2)

7-24 Compute Bond Price Calculate the price of a 5.7 percent coupon bond with 22 years left to maturity and a market interest rate of 6.5 percent. (Assume interest payments are semiannual.) Is this a discount or premium bond? (LG7-4)

7-26 Bond Prices and Interest Rate Changes A 6.5 percent coupon bond with 14 years left to maturity is priced to offer a 7.2 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.8 percent. What is the change in price the bond will experience in dollars? (LG7-5)

7-28 Yield to Maturity A 4.30 percent coupon bond with 14 years left to maturity is offered for sale at $943.22. What yield to maturity is the bond offering? (Assume interest payments are semiannual.) (LG7-6)

7-36 Bond Prices and Interest Rate Changes A 7.5 percent coupon bond with 13 years left to maturity is priced to offer a 6.25 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.0 percent. If this occurs, what would be the total return of the bond in dollars and percentage terms? (LG7-5)

Integrated mini-case Corporate Bond Credit Risk Changes and Bond Prices

Land’o’Toys is a profitable, medium-sized, retail company. Several years ago it issued a 6½ percent coupon bond, which pays interest semiannually. The bond will mature in 10 years and is currently priced in the market as $1,037.19. The average yields to maturity for 10-year corporate bonds are reported in the following table by bond rating.

Bond Rating Yield (%) Bond Rating Yield (%)

AAA 5.4 BB 7.3

AA 5.7 B 8.2

A 6.0 CCC 9.2

BBB 6.5 CC 10.5

C 12.0

D 14.5 Periodically, one company will purchase another by buying all of the target firm’s stock. The bonds of the target firm continue to exist. The debt obligation is assumed by the new firm. The credit risk of the bonds often changes because of this type of an event.

Suppose that the firm Treasure Toys makes an announcement that it is purchasing Land’o’Toys. Due to Treasure Toys’ projected financial structure after the purchase, Standard & Poor’s states that the bond rating for Land’o’Toys bonds will change to BB.

a. Compute the yield to maturity of Land’o’Toys bonds before the purchase announcement and use it to determine the likely bond rating.

b. Assume the bond’s price changes to reflect the new credit rating. What is the new price? Did the price increase or decrease?

c. What is the dollar change and percentage change in the bond price?

d. How do the bond investors feel about the announcement?

8-10 Selling Stock with a Limit Order You would like to sell 100 shares of Echo Global Logistics, Inc. (ECHO). The current ask and bid quotes are $15.33 and $15.28, respectively. You place a limit sell order at $15.31. If the trade executes, how much money do you receive from the buyer? (LG8-4) 8-11 Value of a Preferred Stock A preferred stock from Duquesne

8-18 Dividend Growth Annual dividends of Generic Electrical grew from $0.66 in 2012 to $1.03 in 2017. What was the annual growth rate? (LG8-5)

8-20 Value a Constant Growth Stock Financial analysts forecast Limited Brands (LTD) growth rate for the future to be 12.5 percent. LTD’s recent dividend was $0.60. What is the value of Limited Brands stock when the required return is 14.5 percent? (LG8-5)

8-22 Expected Return Paychex Inc. (PAYX) recently paid a $0.84 dividend. The dividend is expected to grow at a 15 percent rate. At a current stock price of $40.11, what is the return shareholders are expecting? (LG8-5) 8-23 Dividend Initiation and Stock Value A firm does not pay

8-26 P/E Ratio Model and Future Price New York Times Co. (NYT) recently earned a profit of $1.21 per share and has a P/E ratio of 19.59. The dividend has been growing at a 7.25 percent rate over the past six years. If this growth rate continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio increased to 22 in five years? (LG8-7)

8-30 Constant Growth Stock Valuation Campbell Supper Co. paid a $0.632 dividend per share in 2013, which grew to $0.76 in 2016. This growth is expected to continue. What is the value of this stock at the beginning of 2017 when the required return is 8.7 percent? (LG8-5) 8-31 Changes in Growth and Stock Valuation

8-34 Variable Growth A fast-growing firm recently paid a dividend of $0.40 per share. The dividend is expected to increase at a 25 percent rate for the next four years. Afterwards, a more stable 11 percent growth rate can be assumed. If a 12.5 percent discount rate is appropriate for this stock, what is its value? (LG8-6)