Bonds, Preferred Stock, and Common Stock

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1 Bonds, Preferred Stock, and Common Stock I. Bonds 1. An investor has a required rate of return of 4% on a 1-year discount bond with a $100 face value. What is the most the investor would pay for 2. An investor has a required rate of return of 6% on a 1-year discount bond with a $100 face value. What is the most the investor would pay for 3. An investor has a required rate of return of 4% on a 5-year discount bond with a $100 face value. What is the most the investor would pay for 4. An investor has a required rate of return of 6% on a 5-year discount bond with a $100 face value. What is the most the investor would pay for 5. A 5-year discount bond with a $100 face value has a current market price of $74.72, what is the 6. A 1-year discount bond with a $100 face value has a current market price of $90, what is the

2 7. A 2-year discount bond with a $100 face value has a current market price of $90, what is the 8. A 2-year discount bond with a $100 face value has a current market price of $85, what is the 9. A 2-year discount bond with a $100 face value has a current market price of $95, what is the 10. An investor has a required rate of return of 8% on a 3-year, 5% coupon bond ($100 face value, the 5% is the coupon rate). What is the most that the investor would be willing to pay for 11. An investor has a required rate of return of 5% on a 3-year, 5% coupon bond ($100 face value, the 5% is the coupon rate). What is the most that the investor would be willing to pay for 12. An investor has a required rate of return of 10% on a 3-year, 5% coupon bond ($100 face value, the 5% is the coupon rate). What is the most that the investor would be willing to pay for

3 13. An investor has a required rate of return of 10% on a 3-year, 3% coupon bond ($100 face value, the 3% is the coupon rate). What is the most that the investor would be willing to pay for 14. A 3-year, 3% coupon bond ($100 face value) has a current market price of $82.59, what is its yield to maturity? 15. A 2-year, 5% coupon bond ($100 face value) has a current market price of $93, what is its yield to maturity? 16. A consol is a type of bond that pays a regular coupon payment forever. This consol is paying an annual $70 coupon payment and currently sells for $280. What is the yield to maturity on the consol? 17. A consol is making an annual payment of $40. An investor has a required rate of return of 8% on the consol. What is the most the investor would be willing to pay for the consol? 18. A consol is making an annual payment of $40. An investor has a required rate of return of 5% on the consol. What is the most the investor would be willing to pay for the consol? 19. Earlham College, the U.S. Government, and Microsoft all issue the same type of bond. For example, all three issue a 5 year, 4% coupon bond with face value of $100. List the bonds from the highest to lowest price. What does this list imply about the yield to maturity of each bond?

4 II. Preferred Stock 1. A preferred stock makes an annual dividend payment of $10 per year (forever). An investor requires a rate of return of 5%. What is the most the investor would be willing to pay for the preferred stock? 2. A preferred stock currently sells for $100 and makes annual dividend payments of $15. What is the dividend yield on the stock (i.e., what is the required return on the stock)? 3. A preferred stock is paying a $15 dividend per year. The stock is currently selling for $150. What is the dividend yield on the stock (i.e., what is the required return on the stock)? 4. A preferred stock is paying a $15 dividend per year. The stock is currently selling for $75. What is the dividend yield on the stock (i.e., what is the required return on the stock)? III. Common Stock Dividend Discount Model with Constant Growth 5. A common stock is expected to pay a dividend of $5 next year and forever. An investor requires a rate of return of 10% on the stock. What is the most the investor would pay for this stock? 6. A common stock is expected to pay a dividend of $5 next year and forever. An investor requires a rate of return of 8% on the stock. What is the most the investor would pay for this stock?

5 7. A common stock is expected to pay a dividend of $5 next year and forever. An investor requires a rate of return of 12% on the stock. What is the most the investor would pay for this stock? 8. A common stock is expected to pay a dividend of $5 next year and grow at a rate of 2% forever. An investor requires a rate of return of 10% on the stock. What is the most the investor would pay for this stock? 9. A common stock is expected to pay a dividend of $4 next year and grow at a rate of 5% forever. An investor requires a rate of return of 8% on the stock. What is the most the investor would pay for this stock? 10. A common stock is expected to pay a dividend of $4 next year and grow at a rate of 5% forever. The stock is currently selling for $40. What rate of return do stockholders expect? 11. A common stock is expected to pay a dividend of $2 next year and grow at a rate of 4% forever. The stock is currently selling for $40. What rate of return do stockholders expect? 12. A common stock is expected to pay a dividend of $2 next year and grow at a rate of 4% forever. The stock is currently selling for $40. What rate of return do stockholders expect? 13. A common stock is expected to pay a dividend of $2 next year and grow at a rate of 4% forever. The stock is currently selling for $50. What rate of return do stockholders expect?

6 14. A common stock is expected to pay a dividend of $2 next year and grow at a rate of 4% forever. The stock is currently selling for $100. What rate of return do stockholders expect? III. Common Stock Capital Asset Pricing Model (CAPM) 15. A U.S. Treasury bond has an interest rate of 4%. The stock market as a whole is expected to have a rate of return of 10%. A particular stock has a beta of 1. According to CAPM, what is 16. A U.S. Treasury bond has an interest rate of 4%. The stock market as a whole is expected to have a rate of return of 10%. A particular stock has a beta of 2. According to CAPM, what is 17. A U.S. Treasury bond has an interest rate of 4%. The stock market as a whole is expected to have a rate of return of 10%. A particular stock has a beta of 0.5. According to CAPM, what is 18. A U.S. Treasury bond has an interest rate of 6%. The stock market as a whole is expected to have a rate of return of 10%. A particular stock has a beta of 2. According to CAPM, what is 19. A U.S. Treasury bond has an interest rate of 4%. The stock market as a whole is expected to have a rate of return of 12%. A particular stock has a beta of 2. According to CAPM, what is 20. A U.S. Treasury bond has an interest rate of 5%. The stock market as a whole is expected to have a rate of return of 13%. A particular stock has a beta of According to CAPM, what is

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