Stocks Bond Problems Due Beginning of class Tuesday September 28th For this problem set you may work in pairs with anyone on any team in Sections A4 and B4 I encourage you to work in pairs as these are challenging problems However if you would prefer to do these problems by yourself that is acceptable as well Please hand in one copy per pair Please show all work for each answer including all calculator steps taken to find the answer Circle your final answer and write it on the front of this page When you are finished please write your final answers on this answer sheet page and write the name of both teammates I would also like you to write down up to three areas that you feel you understand the most and up to three areas that you would like to review prior to the midterm I will post the solutions immediately after the afternoon section at 2pm on Tuesday Good luck Answers 1 2 3 4 5 Midterm Evaluation 10 6 9 7 8 Areas Problems That We Understand Well Areas Problems That Need More Work 1 2 3 1 2 3 Team Member 1 Team Member 2 1 The Corner Grocer has a 7 year 6 percent annual coupon bond outstanding with a 1 000 par value The bond has a yield to maturity of 5 5 percent By what percent will the bond price increase or decrease if the market yield suddenly increases to 6 5 percent 2 You have won a contest and will receive 2 500 a year in real terms for the next 3 years Each payment will be received at the end of the period with the first payment occurring one year from today The relevant nominal discount rate is 6 3 percent and the inflation rate is 4 5 percent What are your winnings worth today HINT Use the Fischer formula 3 Bond S is a 4 percent coupon bond Bond T is a 10 percent coupon bond Both bonds have 11 years to maturity make semiannual payments and have a yield to maturity of 7 percent If interest rates suddenly rise by 2 percent which Bond has the greatest percentage change and what is the change for that bond 4 Suppose the following bond quote for the Beta Company appears in the financial page of today s newspaper Assume this semiannual bond has a face value of 1 000 and the current date is April 15 2009 What is the yield to maturity on this bond Coupon 9 595 Maturity April 15 2023 Last Price 76 915 5 The yield to maturity on a bond is the interest rate you earn on your investment if interest rates do not change If you actually sell the bond before it matures your realized return is known as the holding period yield Suppose that today you buy a 12 percent annual coupon bond for 1 000 The bond has 13 years to maturity Two years from now the yield to maturity has declined to 11 percent and you decide to sell What is your holding period yield 6 The current dividend yield on Clayton s Metals common stock is 2 5 percent The company just paid a 1 48 annual dividend and announced plans to pay 1 54 next year The dividend growth rate is expected to remain constant at the current level What is the required rate of return on this stock 7 Winter Time Adventures is going to pay an annual dividend of 2 86 a share on its common stock next year This year the company paid a dividend of 2 75 a share The company adheres to a constant rate of growth dividend policy What will one share of this common stock be worth five years from now if the applicable discount rate is 11 7 percent 8 The Farmer s Market just paid an annual dividend of 5 on its stock The growth rate in dividends is expected to be a constant 5 percent per year indefinitely Investors require a 13 percent return on the stock for the first 3 years a 9 percent return for the next 3 years a 7 percent return thereafter What is the current price per share 9 Westover Winds just paid a dividend of 2 50 per share The company will increase its dividend by 8 percent next year and will then reduce its dividend growth rate by 2 percentage points per year until it reaches the industry average of 2 percent dividend growth after which the company will keep a constant growth rate forever What is the price of this stock today given a required return of 12 percent 10 Harvey County Choppers Inc is experiencing rapid growth The company expects dividends to grow at 25 percent per year for the next 7 years before leveling off to 7 percent into perpetuity The required return on the stock is 12 percent What is the current stock price if the annual dividend share that was just paid was 1 05