EXERCISES Question 1 (20 points) Suppose there are two bonds you are considering: Band A Bond B Maturity (years) 15 25 Annual Coupon rate (96] 6 4 Par Value 1000 1000 a. If both bands had a required rate of return of 5%, what would the bonds' prices be? h. Re-calculate the prices of the bonds if the required return falls to 7%. Could you explain why the price increases or decreases given this change in required return? Question 2 (20 points) Calculate the NAV (Net asset value) of the following fund, assuming 500 shares are outstanding. Calculate the percentage change in the NAV of the fund if stock C climbs to $50.7. Stock Shares owned price A 1,500 56.75 B 4,000 $45 .30 C 2,000 $32 .04 Cash n.a. $3,508 a) Will the NAV increase or decrease? Why? b) Calculated your return on your investment given the change in NAV Question 3 (20 points} Suppose the Swiss Franc is currently traded at CHF 0.89/5. The British Pound is traded at GBP 0.79/3. Ignoring transaction costs: a. Determine the CHF/GBP exchange rate consistent with these direct quotations. b. Suppose the CHFIGBP cross rate in the market was at CHF 1.05/GBP. Is there any arbitrage opportunity? Question 4 (30 points} Consider the following three stocks: ' Stock A is expected to provide a dividend of $50 a share forever ' Stock B is expected to pay a dividend of $8 next year. Thereafter, dividend growth is expected to be 2% a year forever. ' Stock C is expected to pay a dividend of $15 next year. Thereafter, dividend growth is expected to be 12% a year for 4 years (until year 5) and zero thereafter. a. If the market capitalization rate for each stock is 8%, which stock is the most valuable? b. What happens if the capitalization rate drops to 6%? Explain c. Assume EPS for stock A is 4, Stock B 9, and Stock C 15. Calculate the PIE ratio for each. Briey explain what the different values mean to you