1. Calculate the price of a $10,000 par, 2-year bond that a coupon of 7.5% paid

Question

1. Calculate the price of a $10,000 par, 2-year bond that a coupon of 7.5% paid annually, if the yield to maturity is 6%. Interest is paid semi-annually.

2. The U.S Treasury issued a $1,000 par, 10-year bond that has a yield to maturity of 3.5%. The bond has no coupon payments. Calculate the price of this zero-coupon bond.

3. Suppose that a 3-year, zero-coupon bond with a face value of $10,000 is currently trading at $8,250. Calculate the bond’s yield to maturity.

4. River Street, Inc. currently pays a dividend of $2.50 per share. The firm’s cost of equity capital is 10%, and dividends are expected to grow at 6% per year for the foreseeable future (i.e. forever). Based on this information, what is the value of the firm’s stock today? What is the value in five years?

5. Cheap & Safe Fuel Energy, Corp. just paid a dividend of $ 3.75 per share. The firm’s dividend is expected to grow at 20% for the next five (5) years. After that the growth rate is expected to be 6% forever. If investors require a return of 8% for investing in the stock of companies of similar risk, what is the value of the stock?

Explanation / Answer

1. Calculate the price of a $10,000 par, 2-year bond that a coupon of 7.5% paid annually, if the yield to maturity is 6%. Interest is paid semi-annually.

The U.S Treasury issued a $1,000 par, 10-year bond that has a yield to maturity of 3.5%. The bond has no coupon payments. Calculate the price of this zero-coupon bond.

Suppose that a 3-year, zero-coupon bond with a face value of $10,000 is currently trading at $8,250. Calculate the bond’s yield to maturity.

YTM ==RATE(3,0,-8250,10000) =6.62%

River Street, Inc. currently pays a dividend of $2.50 per share. The firm’s cost of equity capital is 10%, and dividends are expected to grow at 6% per year for the foreseeable future (i.e. forever). Based on this information, what is the value of the firm’s stock today? What is the value in five years?

Price =D(1+g)/ke-g) = 2.50*(1+.06)/(10%-6%) =$66.25

PV factor Interests 375 3.717098 1393.9 maturity value 10000 0.888487 8884.87 Value of Bond 10279

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