Question

TYPE ANSWERS

1.

• Be able to calculate gains and losses on stock investments

• Understand terminology associated with bonds, and be able to calculate a return on a bond investment

• Identify if a bond is issued at par value, a discount, or a premium

• Be able to give examples of different types of bonds

Answer 1

1.

Suppose a stock A is prices at $50, the dividends paid on this stock is $5. The closing price of this stock is $60.

=( $60 - $50 + $5) /$50 * 100

=30%

Similarly if the stock price falls to $30, the loss on this investment is :

= $15/$50 * 100

= 30% loss on this investment.

2. The future value of a bond

The present value of bond

The coupon interest on a bond

The interest rate on a bond

FV = $1000

The fv of a bond is either $1000 or $100.

PMT = 5% coupon rate * 1000

= $50

the coupon rate of a bond is the interest payments received on a bond.

I/Y = 6%

market interest rate of a bond

N = 6 Years

N= Duration of the bond

The return on a bond is the interest payments received on the present value of a bond,

Suppose i paid $950 for this bond, coupon payments received is $50, the rate of return on the bind investment i s:$50/$950

= 5.26%

A bond is issued at par, of the coupon rate = interest rate on a bond

A bond is issued at a premium if the coupon rate> interest rate on a bond

A bond is issued ta a discount if the interest ate< coupon rate on the bond.

Different types of bonds:

• treasury bonds: these bonds are issued by the federal government
• high yield bonds; these are low quality bonds with a higher rate of default.
• municipal bonds: examples are general obligations bonds and revenue bonds.
• investment grade bonds: these bonds are have a high credit ratings. Example: municipal bond are high grade bonds.