One year ago, you purchased a 7 percent coupon bond with a facevalue of $1,000 w
ID: 2661444 • Letter: O
Question
One year ago, you purchased a 7 percent coupon bond with a facevalue of $1,000 when it was selling for 99.8 percent of par. Today,you sold this bond for 100.5 percent of par. What is your totaldollar return on this investment?a. $63
b. $69
c. $70
d. $72
e. $77
Assume large-company stocks returned 13.1 percent on average overthe past 15 years. The risk premium on these stocks was 7.8 percentand the inflation rate was 5.1 percent. What was the averagerisk-free rate of return for those 15 years?
a. 5.30 percent
b. 8.00 percent
c. 12.90 percent
d. 13.30 percent
e. 21.92 percent
Wellington Goods pays a constant dividend. Last year, thedividend yield was 4.6 percent when the stock was selling for $42 ashare. What must the stock price be if the market currentlyrequires a 4.0 percent dividend yield on this stock?
a. $41.70
b. $42.10
c. $47.50
d. $48.30
e. $48.80
Explanation / Answer
(1)Coupon rate = 7%
Coupon Payment ($1,000 * 7%) = $70
Selling Price of the bond ($1,000 * 99.8%) = $998
Today’s selling price of the bond ($1,000 * 100.5%) =$1,005
$1,005 - $998 + $70 = $77
K = requiredreturn (or) yield on debt security
K* = realrisk-free rate of interest
IP = Inflationpremium
DRP = defaultrisk premium
LP = liquiditypremium
MRP = maturityrisk premium
Stocks return (K) = 13.1%
Maturity risk premium (MRP) = 7.8%
Inflation rate (IP) = 5.1%
Risk-free rate (K*) = ?
K = K*+IP+DRP+LP+MRP
13.1% = K* + 5.1% + 0 + 0 + 7.8%
13.1% = K* + 12.9%
Dividend Yield = 4.6%
Stock Price = $42
Dividend Yield = [Recent Dividend Amount / Current Stockvalue]
4.6% = [Recent Dividend Amount / $42]
Recent Dividend Amount = $42 * 0.046
Recent Dividend Amount = $1.932
Constant Dividend Amount = $1.932
Calculating Stock Value :
Dividend Yield = [Recent Dividend Amount / Current Stockvalue]
0.04 = [$1.932 / Stock Value]
Stock Value = $1.932 / 0.04
Stock Value = $48.30
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