1) Bill buys a 12-year bond with a face value of $1000 and an annual coupon rate of 6%. All coupons are paid annually and the first coupon received in year one. Bill pays $1030 for the bond. As soon as the coupons are received Bill invest them in a fund earning an effective annual rate of 6.5%. What is the yield on Bill's total investment?

2) Consider the following investment: The investment pays a decreasing annuity due with the first payment of $6 at the beginning of year 1 decreasing to a $1 payment at the beginning of year 6. The investment then pays $2 at the beginning of year 7 and increases by $1 per year until it pays $8 at the beginning of year 13. The investment then pays a steady $9 from the beginning of year 14 until the beginning of year 21. If i = 5.5%, calculate the selling price of this investment shortly before the first payment.

3) A stock is expected to pay a dividend of $10 at the end of year one. The dividend is then expected to grow at a rate of 8% per year for the next four years. The dividend is then expected to grow at a rate of 3% per year forever. If the annual effective rate for this stock is 8%, use the dividend growth model to calculate the price of the stock.

Answer rating: 100% (QA)

1 To find the yield on Bills total investment we need to calculate the present value of the bond and the future value of the coupons invested in the f... View the full answer