We have the opportunity to buy a 10-year (original term) bond with 8 years of semi-annual coupon payments remaining.  The annual coupon rate is set at 6% ($30 semi-annual payment).  If the current Yield to Maturity (prevailing market rate on comparable bonds) is approximately 6.5%, estimate the appropriate purchase price of the bond.

2.  A zero coupon bond promises to pay you $1000 par value on each bond after 5 years.  Approximate the selling price on the zero-coupon bond if the appropriate current yield to maturity on bonds like this is about 7%.  

3.  A 7-year callable bond has a coupon rate of 5% (paid semi-annually).  The total term of the bond is 7 years but the bond is callable in 3 years with a prepayment penalty of 1 year's coupon interest (two semi-annual payments).  The bond dealer tells you that the price on this bond is 102.50.  Calculate your approximate Yield to Call (YTC) and your approximate YTM.  

4.  You have decided to purchase common stock of Bennett Manufacturing and hold it for 7 years. The directors of the company just announced that they expect to pay an annual cash dividend of $4.00 per share for at least the next 8 years. In your research on target prices for this stock, several analysts say that Bennett common shares should be worth around $80 to $90 at the end of seven years. In order to earn 12% return on this investment, how much would you be willing to pay for this stock?

5.  Over the last five years a company has paid $3.00, $3.04, $3.11, $3.20, and $3.29 as dividends. Using the Gordon Model, about what would this dividend stock be worth to someone requiring a 10% rate of return?  

6.  We are in the market for Unilever common stock and we need an estimate of required return (expected rate of return) for Unilever so that we can calculate the present value of future expected cash flows.  Using the CAPM model, calculate the expected rate of return for Unilever using 1.50% as your risk-free rate, 11% as the total (market) return of similar stocks, and the current Beta estimate for Unilever of .40.

Discussion Questions:  Please answer the following questions in your words.  These are somewhat open-ended and general and I am frankly just trying to see if you have a firm grasp of the main concepts we have discussed.  There are a few key words I am looking for in each answer but tell me your thoughts and opinions as well where possible.  

1.  How is the yield you receive on bonds determined?  Why are bond yields generally much higher than they were one year ago?  Why did treasury yields fall like a rock just after Silicon Valley Bank and other banks revealed major problems in the banking system?  Given our discussion of risk and return, what are the pro's and con's of investing in the bond market vs. the stock market at this time?  What types of bonds would you recommend and why?  

2.  Discuss the benefits of early stock repurchase and clear and predictable dividend policy.  In general, what are the factors which drive stock valuation (causing ups and downs)?  Why are stocks MUCH tougher to value than bonds?  Is our stock market overvalued at this time?  

3.  Throughout these three chapters we have noted that investing involves risk and uncertainty.  As a future millionaire investor, what are some of the tools you will be using and considerations you will be giving when selecting investments and trying to manage risk.  

4.  What were the five big meaningful takeaways you got from this second unit of material (and why?).

Answer rating: 100% (QA)

1 Bond Yield Determination The yield on bonds is primarily determined by the prevailing market interest rates When you buy a bond you are essentially lending money to the issuer and the yield represen... View the full answer