A) Bennifer Jewelers recently issued ten-year bonds that make annual interest pa

Question

A) Bennifer Jewelers recently issued ten-year bonds that make annual interest payments of $50. Suppose you purchased one of these bonds at par value when it was issued, then right away market interest rates jumped and the YTM on your bond rose to 6%. What happened to the price of your bond?

B) Argaiv Towers has outstanding an issue of preferred stock with a par value of $100. It pays an annual dividend equal to 8% of par value. If the required return on Argaiv preferred stock is 6%, and if Argaiv pays its next dividend in one year, what is the market price of the preferred stock today?

C) Suppose a preferred stock pays a quarterly dividend of $2 per share. The next dividend comes in exactly one-fourth of a year. If the price of the stock is $80, what is the effective annual rate of return that the stock offers investors?

D) Gail Dribble is analyzing the shares of Petscan Radiology. Petscan

Explanation / Answer

A> If the market interest rate increase , the price of the bond will decrease as investors will be better of in putting their money in other savings instruments.

B>Market Price=Discount Value of the FV of Bond plus the dividend=(100+8)/1.06=101.88

C>Effective Rate of Return=(Dividend in 4 quaters)/Price=(2*4)/80=0.1 or 10%

D>Cost of the Stock=DIV1/P + g= (0.85*1.07)/12.14+0.07=0.1449=14.49%

Since 14.49%>13% , she should hold on to the share.

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