Question

Q14.

Five years ago bonds were issued at par with 20 years until maturity and a 7% annual coupon. If interest rates for that grade of bond are currently 6%, what will be the market price of these bonds now?

Multiple Choice

• $1,054.82

• $928.84

• $1,034.59

• $1,097.12

Q15.

Sue purchased a stock for $25 a share, held it for one year, received a $1.34 dividend, and sold the stock for $26.45. What exact real rate of return did she earn if the inflation rate during that year is 5%?

Multiple Choice

• 7.85%

• 11.16%

• 5.87%

• 6.16%

Answer 1

Answer to Question 14:

Par Value = $1,000

Annual Coupon Rate = 7.00%
Semiannual Coupon Rate = 3.50%
Semiannual Coupon = 3.50% * $1,000
Semiannual Coupon = $35

Time to Maturity = 15 years
Semiannual Period = 30

Annual Interest Rate = 6.00%
Semiannual Interest Rate = 3.00%

Market Price = $35 * PVIFA(3.00%, 30) + $1,000 * PVIF(3.00%, 30)
Market Price = $35 * (1 - (1/1.03)^30) / 0.03 + $1,000 * (1/1.03)^30
Market Price = $35 * 19.60044 + $1,000 * 0.41199
Market Price = $1,097.12

Answer to Question 15:

Selling Price = $26.45
Purchase Price = $25.00
Dividend paid = $1.34

Nominal Return = (Selling Price + Dividend – Purchase Price/ Purchase Price * 100
Nominal Return = ($26.45 + $1.34 - $25.00) / $25.00 * 100
Nominal Return = $2.79/ $25.00 * 100
Nominal Return = 11.16%

Real Rate of Return = (Nominal Interest rate – Inflation Rate)/ (1 + Inflation Rate)
Real Rate of Return = (0.1116 – 0.05)/ (1 + 0.05)
Real Rate of Return = 0.0616 / 1.05
Real Rate of Return = 0.0587
or Real Rate of Return = 5.87%