midterm_answers

midterm_answers - . PRINT NAME Economics 106F Finance...

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........................................................................... PRINT NAME Economics 106F Finance Professor E. Landaw Midterm July 18, 2005 Please answer all questions 1 . You open your Wall Street Journal (WSJ) on the morning of July 16, 2005, and see the following bond quote for ABC. Based on this WSJ information, answer the following questions. Company (ticker) Annual Coupon Maturity Last Price Last Yield Est Spread UST Est $ Vol (000's) ABC 6.000 Jul 16, 2007 Or 2 years 103.772 ??? 60 2 45,040 A . What is the YTM for this ABC Corporate Bond? Is it (circle the correct answer): a. YTM = 3.33 % b. YTM = 4.00 % c. YTM = 4.44 % d. YTM = 5.00 % ANS: B B . What is the coupon yield of this bond over the next year? Coupon yield = Annual coupon/Price = 60/$1037.72 = 5.78% C . If your required rate of return for a bond of this risk-class is 4.7 percent, what value do you place on this ABC bond? P = 60/(1.047) + 1060/(1.047)sq = 1024.28 D . At this required rate of return of 4.7 percent are you interested in purchasing this bond? No, cost is $1,037.72 but you value it at $1,024.28 E . If you purchased this ABC bond for $1,037.72 yesterday and the market rate of interest for this bond is 4.5 percent today, do you have a gain or loss? How much is that gain or loss in dollars? Rates increase 4.5% Price drops to $1089.22 = P = 60/(1.045) + 1060/(1.045)sq = 1028.09
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........................................................................... PRINT NAME 2. A one year default-free zero-bond offers a yield of 6% and a two year default-free zero-bond offers a yield of 7.5%. What should be the price of a two year coupon bond that pays a 8% coupon rate, assuming coupon payments are made once a year starting one year from now. P = 80/(1.06) + 1080/(1.075)sq = 1010.03 3. Carbohydrates Anonymous (CA) operates a chain of weight-loss centers for meat lovers. Its services have been in great demand in recent years and its profits have soared. CA recently paid an annual dividend of $1.35 per share. Investors expect that the company will increase the dividend by 20 percent in each of the next three years, and after that they anticipate that dividends will grow by about 5 percent per year. If the market requires an 11 percent return on CA stock, what should the stock sell for today? The dividend stream for the next few years looks like this: Next year $1.62 (up 20% from this year) 2 nd year $1.944 (up 20%) 3 rd year $2.333 (up 20%) 4 th year $2.449 (up 5%) 59 . 34 05 . 0 11 . 0 449 . 2 11 . 1 1 11 . 1 333 . 2 11 . 1 944 . 1 11 . 1 62 . 1 3 3 2 = × + + + = P 4. Your investment adviser has sent you three analyst reports for a young, growing company named Vegas Chips, Incorporated. These reports depict the company as speculative, but each one poses different projections of the company’s future growth rate in earnings and dividends. All three reports show that Vegas Chips earned $1.20 per share in the year ended previously. There is
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midterm_answers - . PRINT NAME Economics 106F Finance...

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