Exam 10: Valuation Concepts

Assume that you can purchase a 15-year,$1,000 face value bond which pays interest on a semiannual basis,for $1,324.23.If the market's effective annual required rate of return is 8.16 percent (or 4 percent semi-annually),how much interest does this bond pay each year?

All else equal,a higher coupon rate on a bond results in a higher market price for the bond.

The coupon rate is used to determine the size of the periodic interest payments made to the purchaser of the bond and varies directly with changes in the market interest rate over the life of the bond.

A 20-year original maturity bond with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates. )

Which of the following statements is correct?

For bonds,price sensitivity to a given change in interest rates generally increases as years remaining to maturity increases.

Suppose that you read in The Wall Street Journal that a bond has a coupon rate of 9 percent,a price of 71 3/8,and pays interest annually.Rounded to the nearest whole percent,what would be the bond's "current" yield?

Semiannual payment bonds with the same risk (Aaa)and maturity (20 years)as your company's bonds have a simple (not effective annual rate)yield of 9 percent.Your company's treasurer is thinking of issuing at par some $1,000 par value,20-year,quarterly payment bonds.She has asked you to determine what quarterly interest payment,in dollars,the company would have to set in order to provide the same effective annual rate (EAR)as those on the 20-year,semiannual payment bonds.What would the quarterly interest payment be,in dollars?

Modular Systems Inc.just paid dividend D₀,and it is expecting both earnings and dividends to grow by 0 percent in Year 1 and 2,by 5 percent in Year 3,and at a rate of 10 percent in Year 4 and thereafter.The required return on Modular is 15 percent,and it sells at its equilibrium price,P₀ = $49.87.What is the expected value of the next dividend, ? (Hint: Draw a time line and then set up and solve an equation with one unknown, )

You have a chance to purchase a perpetual security that has a stated annual payment (cash flow)of $50.However,this is an unusual security in that the payment will increase at an annual rate of 5 percent per year;this increase is designed to help you keep up with inflation.The next payment to be received (your first payment,due in 1 year)will be $52.50.If your required rate of return is 15 percent,how much should you be willing to pay for this security?

You are offered a $1,000 par value bond which has a stepped-up coupon interest rate.The annual coupon rate is 10 percent coupon,payable semiannually ($50 each 6 months)for the first 15 years,and then the annual coupon increases to 13 percent,also payable semiannually,for the next 15 years.The first interest payment will be made 6 months from today,and the $1,000 principal amount will be returned at the end of Year 30.You currently have savings in an account which is earning a 9 percent simple rate,but with quarterly compounding;this is your opportunity cost for purposes of analyzing the bond.What is the value of the bond to you today?

Which of the following statements is most correct?

The Jones Company has decided to undertake a large project.Consequently,there is a need for additional funds.The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30.If the required return on this stock is currently 20 percent,what should be the stock's market value?

The yield to call is always higher than the yield to maturity for coupon bonds.

You have just purchased a 10-year,$1,000 par value bond.The coupon rate on this bond is 8 percent annually,with interest being paid each 6 months.If you expect to earn a 10 percent simple rate of return on this bond,how much did you pay for it?

Assume that you own a hundred $1,000 par value bonds,with a total face value of $100,000.These bonds have a 4 percent coupon,pay interest semiannually,and have 5 years remaining until they mature.New bonds with the same risk and maturity provide yields to maturity of 14 percent.You are considering selling your bonds and depositing the proceeds in a savings account which pays interest at a rate of 6 percent,annual compounding.If you do make the transaction,you will liquidate the savings account by making 5 equal withdrawals,the first coming 1 year from now.What will be the amount of each annual withdrawal?

Which of the following statements is correct?

Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40.If you require a 10 percent simple yield to maturity on this investment,what is the maximum price you should be willing to pay for the bond?

A two-year zero-coupon Treasury bond with a maturity value of $1,000 has a price of $873.4387.A one-year zero-coupon Treasury bond with a maturity value of $1,000 has a price of $938.9671.If the pure expectations theory is correct,for what price should one-year zero-coupon Treasury bonds sell one year from now?

Which of the following will generally result in a higher price for a bond?