ASSIGNMENT

Submission Date:

$1$

$7$

th February,

$2$

$0$

$2$

$4$

$$in soft copy or hard copy

The Garraty Company has two bond issues outstanding. Both bonds pay $

$1$

$0$

$0$

$$annual interest plus $

$1$

$,$

$0$

$0$

$0$

$$at maturity. Bond

$$

$$has a maturity of

$1$

$5$

$$years$,$ and Bond

$$

$$a maturity of

$1$

$$year$.$

a

$.$

$$What will be the value of each of these bonds when the going rate of interest is

$($

$1$

$)$

$5$

$$percent$,$

$($

$2$

$)$

$8$

$$percent$,$ and

$($

$3$

$)$

$1$

$2$

$$percent$?$ Assume that there is only one more interest payment to be

made on Bond

$$

$.$

b

$.$

$$Why does the longer

$-$

term

$($

$1$

$5$

$-$

year

$)$

$$bond fluctuate more when interest rates change than does the shorter

$-$

term bond

$($

$1$

year

$)$

$?$

Microtech Corporation is expanding rapidly, and it currently needs to retain all of its earnings, hence it does not pay any dividends. However, investors expect Microtech to begin paying dividends, with the first dividend of $

$1$

$.$

$0$

$0$

$$coming

$3$

$$years from today. The dividend should grow rapidly

$-$

$$at a rate of

$5$

$0$

$$percent per year

$-$

during Years

$4$

$$and

$5$

$.$

$$After Year

$5$

$,$The Garraty Company has two bond issues outstanding. Both

bonds pay $$100$ annual interest plus $$1,000$ at maturity. Bond $L$

has a maturity of $15$ years, and Bond $S$ a maturity of $1$ year.

a$.$ What will be the value of each of these bonds when the going

rate of interest is

$(1)5$ percent,

$(2)8$ percent, and

$(3)12$ percent? Assume that there is only one more interest

payment to be

made on Bond $S.$

b$.$ Why does the longer$-$term $(15-$year$)$ bond fluctuate more

when interest rates change than does the shorter$-$term bond $(1-$

year$)?$

Microtech Corporation is expanding rapidly, and it currently

needs to retain all of its earnings, hence it does not pay any

dividends. However, investors expect Microtech to begin paying

dividends, with the first dividend of $$1\mathrm{.}00$ coming $3$ years from

today. The dividend should grow rapidly $-$ at a rate of $50$ percent

per year$-$during Years $4$ and $5.$ After Year $5,$ the company

should grow at a constant rate of $8$ percent per year. If the

required return on the stock is $15$ percent, what is the value of

the stock today?