A 10-year corporate bond has a coupon rate of 5% with annual payments. If interest rates rise to 8% on
similar bonds, then what is the value of the bond in the marketplace?
2) A 10-year corporate bond has a coupon rate of 5% with quarterly payments. If interest rates rise to 8% on
similar bonds, then what is the value of the bond in the marketplace?
3) A 100-year corporate bond has a coupon rate of 5% with annual payments. If interest rates drop to 4% on
similar bonds, then what is the value of the bond in the marketplace?
4) A 100-year corporate bond has a coupon rate of 5% with monthly payments. If interest rates drop to 4% on
similar bonds, then what is the value of the bond in the marketplace?
5) A 30-year annual bond is offered at 5%. After that the buyer of the bond sells the bond to someone else, but
in between interest rates rose to 5.5%. Why is the first buyer of the bond upset with what the second buyer
of bond is willing to pay?
6) A 10-year corporate bond has a coupon rate of 5% with annual payments. If the current value of the bond in
the marketplace is $900, then what is the Yield-to-Maturity (YTM)?
7) A 100-year corporate bond has a coupon rate of 5% with semi-annual payments. If the current value of the
bond in the marketplace is $400, then what is the Yield-to-Maturity (YTM)?
8) How much do you pay for a zero coupon government bond that has a term of 30 years, an interest rate of
5%, and a par value of $1000.
9) A taxable bond has a yield of 5% and a municipal bond has a yield of 4.6%. If you are in a 23% tax bracket,
which bond do you prefer?
10) A taxable bond has a yield of 8% and a municipal bond has a yield of 5%. If you are in a 23% tax bracket,
which bond do you prefer?
11) Suppose you are thinking of purchasing the stock of XYZ Electronics, Inc. You expect it to pay a $4.00
dividend in one year. You believe you can sell the stock for $25.00 at that time. You require a return of 5%
on investments of this risk. What is the maximum you would be willing to pay?
12) Suppose you are thinking of purchasing the stock of XYZ Electronics, Inc. In addition to the dividend and price
from year one you expect it to pay a $4.60 dividend in two years. You believe you can sell the stock for
$28.75 at that time. You require a return of 5% on investments of this risk. What is the maximum you would
be willing to pay?
13) Suppose you are thinking of purchasing the stock of XYZ Electronics, Inc. In addition to the dividend and price
from year one and two you expect it to pay a $5.29 dividend in three years. You believe you can sell the
stock for $33.06 at that time. You require a return of 5% on investments of this risk. What is the maximum
you would be willing to pay?
14) Suppose a stock is expected to pay a $1.00 dividend every month and the required return is 5% with monthly
compounding. What is the price?
15) Suppose Big Al’s Pizza, Inc. just paid a dividend of $0.75. It is expected to increase its dividend by 4% per
year. If the market requires a return of 5% on assets of this risk, how much should the stock be selling for?
16) The News Company is expected to pay a dividend of $10 next period and dividends are expected to grow at
5% per year. The required return is 18%. What is the current price?
17) Suppose we are trying to value the company Beta Investments, an investment firm that does not pay
dividends. If the appropriate industry PE for this type of company is 15 and you predict earnings to be $5.00
per share for the coming year. What is the forecasted stock price for a year from now?
18) Suppose the stock price of the company Alpha Investments, an investment firm that does not pay dividends,
is $210.00. If the appropriate industry PE for this type of company is 5. What is the forecasted earnings for
Alpha Investments?
19) Explain what debt investments are investment grade. What rate of return would you expect on investment
grade debt versus other non-investment grade debt (and why)?
20) Explain the difference between constant dividend growth and supernatural dividend growth.
