Set Review 5 Finance 320 Winter 2011
Problems to Work 1. Work from Ch. 6, p, 196-7, Problems 3, 4, 6, and 7. (When you work these problems assume that interest payments are being made semi-annually, for problems 3 and 6 assume that the quoted YTM is APR; for problems 4 and 7 determine the 6-month YTM, APR and EAR) 2. Work from Ch. 7, p, 226, Problem 8. For this problem also determine the value of the preferred stock if the discount rate is 8%. Now assume that this preferred stock had a face value of $80, and that you expect the stock to be called in two years and six months with a 1% call premium. Use the $4.5 dividend that is already included in the problem. How much would you be willing to pay for this stock if you wanted an 8% APR, remember that dividends are paid on a quarterly basis? 3. Work from Ch.7, p, 225-6, Problems 1, 4, 6, and 10. Old Test Problems 1.What is the six-month yield to maturity on bonds issued by Swamp Adventures bonds Inc. with a coupon rate of 6%, and that have exactly years 5 and 6 months to maturity and are priced at $1,020. Should you buy the bond if you want to earn an APR of 5.75%? Explain. Is the bond selling at a discount or a premium? Why? (I want to know why it is selling at a premium or a discount not how you know that it is selling at a discount or a premium.) 2. Swamp Adventure bonds selling for $940 mature May 7, 2022 and have a 7% coupon rate. Would you buy this bond if you want to earn an APR of 7.4% based on your valuation of the bond? Explain. Given the current price, what is the minimum coupon rate that the bonds would have to pay in order for you to be willing to buy the bond at its current price? Round your answer to two decimals. 3. Swamp Adventure preferred stock has just paid its quarterly dividend. You expect the preferred stock to be called in a year and six months with a call premium of 1%. The stock has a face of $60 and a dividend rate of 6%. Would you buy the stock if the market price is $57 and you desire an APR of 8%? Explain.