Question

 

4)

A 25​-year bond with a face value of $1,000 has a coupon rate of 8.50%​, with semiannual payments.  

a. What is the coupon payment for this​ bond?

b. Enter the cash flows for the bond on a timeline.

a. What is the coupon payment for this​ bond?

The coupon payment for this bond is $ -----. (Round to the nearest​ cent.)

b. Enter the cash flows for the bond on a timeline.

Cash Flow

Amount ​(Round to the nearest​ cent.)​

CF1	CF2	CF49	CF50
$ -------	​$ -------	​$ -------	$--------

9)

Assume​ Evco, Inc., has a current stock price of $56 and will pay a $2.25 dividend in one​ year; its equity cost of capital is 19%. What price must you expect Evco stock to sell for immediately after the firm pays the dividend in one year to justify its current​ price?

The expected price is $ ----------. (Round to the nearest​ cent.)

2)

Which do you​ prefer: a bank account that pays 8% per year​ (EAR) for three years​ or:

a. An account that pays 4% every six months for three​ years?

b. An account that pays 12% every 18 months for three​ years?

c. An account that pays 0.8% per month for three​ years?

a. An account that pays 4% every six months for three​ years? If you deposit $1 into a bank account that pays 8% per year for three​ years, you will have ​$ ----------------. (Round to five decimal​ places.)

Answer 1

A 25​-year bond with a face value of $1,000 has a coupon rate of 8.50%​, with semiannual payments.

a. What is the coupon payment for this​ bond?

Since the payments are semiannual, the semi annual rate = 8.5%/2 = 4.25% - using this rate, the coupon payment is 4.25%*face value = 0.0425*1000 = $42.5

b. Enter the cash flows for the bond on a timeline

After every 6 months, there will be a coupon payment of $42.5. Hence the cash flows will be as follows:

CF1	CF2	CF3	CF4	CF5	CF6	CF7	CF8	CF9	CF10	CF11	CF12	CF13	CF14	CF15	CF16	CF17	CF18	CF19	CF20	CF21	CF22	CF23	CF24	CF25	CF26	CF27	CF28	CF29	CF30	CF31	CF32	CF33	CF34	CF35	CF36	CF37	CF38	CF39	CF40	CF41	CF42	CF43	CF44	CF45	CF46	CF47	CF48	CF49	CF50
$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5	$42.5

9)

Assume​ Evco, Inc., has a current stock price of $56 and will pay a $2.25 dividend in one​ year; its equity cost of capital is 19%. What price must you expect Evco stock to sell for immediately after the firm pays the dividend in one year to justify its current​ price?

Which do you​ prefer: a bank account that pays 8% per year​ (EAR) for three years​ or:

a. An account that pays 4% every six months for three​ years?

b. An account that pays 12% every 18 months for three​ years?

c. An account that pays 0.8% per month for three​ years?

Let the principal invested = P. Let us calculate the amount at the end of 3 years in each of the cases

a. There are 6 periods of six months in 3 years. Hence Amount = P*(1+0.04)^(6) = P*1.265319

b. There are 2 periods of 18 months in 3 years. Hence Amount = P*(1+0.12)^(2) = P*1.2544

c. There are 36 periods of one month in 3 years. Hence amount = P*(1+0.008)^36 = P*1.33223

In the first case, the amount at 8% annually for 3 years = P*(1+0.08)^3 = P*1.259712

Clearly, the option c is the best option as the amount is the greatest after 3 years

If you deposit $1 at 8% for 3 years, amount as calculated above = 1*1.259712 = 1.25971 approx