Question

Bond A has a coupon rate of 10%, with a three-year maturity and a face value of $1,000. If the discount rate now or future is 10%, and you want to buy bond A now, what is the price you have to pay now (P0)?

Stock A has an earnings of $5 per share at year 1. The interest rate is 20%, and the return on equity is 25%. If there is no plow-back, what is the book value of equity per share at the beginning of year 10 ?

What happens to the price of a one-year bond with a coupon rate of 8% when the interest rate changes from 6% to 8%?

Your friend promises you a perpetuity of $1 every year, which starts in year 1. However, your friend is an absent-minded guy, paying you $2 at year 9 but no payment at year 10. Except for these two years, in other years, the payment is always $1. Which of the following is right about the present value at year zero of your friend’s all payments if r = 5%?

Answer 1

1.
As coupon rate is equal to ytm, price now=par value=1000

2.
NA

3.
Change in price=1080/1.08-1080/1.06=-18.8679

Price decreases/falls by 18.8679

4.
=1/5%+1/1.05^9-1/1.05^10
=20.0307