Answer all the following questions (each question carries 3 marks)
- A bond has a maturity of 10 years, with a coupon rate of 10% and par value of $1000.
- If the yield to maturity is equal to 10%, without doing any calculations, explain what should be the price ofthe
- If the yield to maturity is equal to 12%, calculate the price of the
- If the yield to maturity is equal to 8%, calculate the price of the
- Lamar Company’s required rate of return 15%,which plans to pay a dividend of $3.60 per share in the next year, anticipates that its future dividends will increase at an annual constant growth rate with that experienced over 2014-2019 period, when the following dividends were paid.
| Year | Dividend per share (DPS) |
| 2019 | $1.40 |
| 2018 | 1.29 |
| 2017 | 1.20 |
| 2016 | 1.12 |
| 2015 | 1.05 |
| 2014 | 1.00 |
- If the risk-free rate is 9 percent, what is risk premium on the company’s stock?
- Find the annual growth rate of the company’s stock?
- Using the constant growth model, estimate the value of the company’s stock?
- Ali invested two stocks, A and B. he invested Stock A $4000 of the value of the portfolio and stock B invested $6000. The expected returns over the next 6 years, 2020-2025, for each of these stocks are shown in the following table.
| Expected returns | ||
| Year | Stock A | Stock B |
| 2020 | 10% | 10% |
| 2021 | 11 | 18 |
| 2022 | 11 | 11 |
| 2023 | 17 | 13 |
| 2024 | 13 | 12 |
| 2025 | 10 | 17 |
- Calculate the weight, Wp, for each of the 6 years.
- Compute the expected value of portfolio returns over the 6-year period.
- Calculate the standard deviation of expected portfolio returns over the 6-year period
- The preceding example showed that when the required return equaled the coupon interest rate, the bond’s value equaled its $1,000 par value. If for the same bond the required return were to rise to 12% or fall to 8%, what would happen.
