Question

1. what is the effective interest rate for a savings accounting that is compounded quarterly at 8%?

2. a bond has a current market price of $1230.00. it is said to be selling at a

a. premium

b. discount.

c. bonus

d. reward

2. bond c has a $1000 face value and provides an 8% semiannual coupon for 15 years. the appropriate discount rate is 10% (annual rate). what is the value of the coupon bond?

3. if the next period's dividend is $3.00 the required return is 12 percent and the growth rate is 7 percent, what is the firm's stock price?

Answer 1

1

EAR = [(1 +stated rate/no. of compounding periods) ^no. of compounding periods - 1]* 100

Effective Annual Rate = ((1+8/4*100)^4-1)*100

Effective Annual Rate% = 8.24

2

Premium bond, as par value = 1000 and price is more than par

2

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =15x2

Bond Price =∑ [(8*1000/200)/(1 + 10/200)^k]     +   1000/(1 + 10/200)^15x2

k=1

Bond Price = 846.28

3

As per DDM

Price = Dividend in 1 year/(cost of equity - growth rate)

Price = 3/ (0.12 - 0.07)

Price = 60