2. The U.S Treasury issued a $1,000 par, 10-year bond that has a yield to maturi

Question

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

2)

We have:

FV=1000

N= 10

R=3.50%

Price of the bond can be calculated using the following formula:

PV= FV/(1+r)^n

      = 1000/ ( 1+0.035)^10

      = 1000/ 1.4106

      = 708.92

Hnce the price of this bond would be 708.92

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