1. Cy owns investment A and 1 bond B. The total value of his holdings is...

1. Cy owns investment A and 1 bond B. The total value of his holdings is 1,936 dollars. Bond B has a coupon rate of 8.6 percent, par value of $1000, YTM of 9.18 percent, 11 years until maturity, and semi-annual coupons with the next coupon due in 6 months. Investment A is expected to produce annual cash flows forever. The next cash flow is expected to be 86.86 dollars in 1 year, and subsequent annual cash flows are expected to increase by 5.54 percent each year forever. What is the expected return for investment A? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Expert Solution


The total value of his holding is 1,936

we first calculate the value of bond

Coupon	(0.08610001/2)
	43

we use the excel PV formula to calculate the Price of bond

PV(9.18%/2,22,43,1000)

960.36

The present value of investment A	(1936 - 960.36)

		975.64

the present value of growing perpetuity = expected cash flow/(required rate - growth rate)

975.64 =	86.86/(required rate - 0.0554)

required rate	86.86/975.64 + 0.0554

=	14.44%

jeff jeffy answered 2 years ago

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