Question

1. A investor is considering purchasing a $1,000 bond with an 8% coupon rate. The bond was issued 7 years ago with a 30 year original maturity. If the investor requires a return of 7% based on the riskiness oft he bond, how much should she pay for the bond?

2. As of now Treasury bills are returning 2% and the S&P 500 is returning 10%.You are considering purchasing a stock in CCC firm. The firm has an estimated beta of 1.2. You expect the firm's stock to pay a dividend of $20 at the end of the year. Based on historical growth, you expect dividends to grow at 4%. If you require a return of 8%, how much should you pay for this stock?

Answer 1

Paticulars	Amount
PV of coupon payments = 80*11.27219	901.78
PV of maturity price =1000*.21095	210.95
Market value of bond = 901.78 +210.95	1,112.73
Time	PVF at 7%
1.00	0.93458
2.00	0.87344
3.00	0.81630
4.00	0.76290
5.00	0.71299
6.00	0.66634
7.00	0.62275
8.00	0.58201
9.00	0.54393
10.00	0.50835
11.00	0.47509
12.00	0.44401
13.00	0.41496
14.00	0.38782
15.00	0.36245
16.00	0.33873
17.00	0.31657
18.00	0.29586
19.00	0.27651
20.00	0.25842
21.00	0.24151
22.00	0.22571
23.00	0.21095
PVFfor 23 years	11.27219
Q2P0= D1/(ke-g)
P0 = 20/(8%-4%)
P0 = 20/(4%)
P0 = $500
We should pay $500 for the stock