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Section 12 - Chap 12

Section 12 - Chap 12 - AEM 323 Section Problem Set 12...

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AEM 323 Section Problem Set 12 Covering Material from Chapter 12 Problem 1 It is April 25, 2005 and you wish to make an investment. Analyze the following investments over a 5 year horizon using Net Present Value: I. 5 year Treasury bond Current price is \$10,000 4% interest (paid annually and assume today’s payment was already made) \$10,000 principal Matures April 25, 2005 (A bond pays back its principal at maturity) II. An investment in an S&P 500 index: 1,161.00 \$ 1,705.89 \$ Expected Dividends: 2006 46.44 \$ (to be paid on April 25) 2007 50.16 \$ 2008 54.17 \$ 2009 58.50 \$ 2010 63.18 \$ S&P on April 25, 2005: S&P expected value April 25, 2010: The required rate of return is 4% for 5 year Treasuries and 12% for the S&P 500. 1

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Problem 2 Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return that she is earning. For example, three years ago she paid \$13,000 for 200 shares of Malti Company's common stock. She received a \$420 cash dividend on the stock at the end of each year for three years. At the end of three years, she sold the stock for \$16,000. Kathy would like to earn a return of at least 14% on all of
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