Chap6 - Chapter 6: How to Value Bonds and Stocks $1,000 /...

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Chapter 6: How to Value Bonds and Stocks 6.1 a. $1,000 / 1.05 10 = $613.91 b. $1,000 / 1.10 10 = $385.54 c. $1,000 / 1.15 10 = $247.18 6.2 The amount of the semi-annual interest payment is $40 (=$1,000 × 0.08 / 2). There are a total of 40 periods; i.e., two half years in each of the twenty years in the term to maturity. The annuity factor tables can be used to price these bonds. The appropriate discount rate to use is the semi-annual rate. That rate is simply the annual rate divided by two. Thus, for part a the rate to be used is 4.0%, for part b the rate to be used is 5% and for part c it is 3%. a. $40 40 04 . 0 Α + $1,000 / 1.04 40 = $1,000 Notice that whenever the coupon rate and the market rate are the same, the bond is priced at par. b. $40 40 0.05 Α + $1,000 / 1.05 40 = $828.41 Notice that whenever the coupon rate is below the market rate, the bond is priced below par. c.$40 40 0.03 Α + $1,000 / 1.03 40 = $1,231.15 Notice that whenever the coupon rate is above the market rate, the bond is priced above par. 6.3 Semi-annual discount factor = (1.12) 1/2 - 1 = 0.058300 = 5.83% a. Price = $40 40 0.0583 Α + $1,000 / 1.0583 40 = $614.98 + $103.67 = $718.65 b. Price = $50 30 0.0583 Α + $1,000 / 1.0583 30 = $700.94 + $182.70 = $883.64 6.4 Effective annual rate of 10%: Semi-annual discount factor = (1.10) 0.5 - 1 = 0.048809 = 4.8809% Price = $40 40 0.048809 Α + $1,000 / 1.048809 40 = $697.71 + $148.64 =$846.35 6.5 $923.14 = C 30 0.05 Α + $1,000 / 1.05 30 = (15.3725) C + $231.38 C = $45.00 The annual coupon rate = $45.00 × 2 / $1,000 = 0.09 = 9% 6.7 a. P A = $100 20 0.10 Α + $1,000 / 1.1 20 = $1,000.00 P B = $100 10 0.1 Α + $1,000 / 1.10 10 = $1,000.00 b. P A = $100 20 0.12 Α + $1,000 / 1.12 20 = $850.61 P B = $100 10 0.12 Α + $1,000 / 1.12 10 = $ 887.00 c. P A = $100 20 0.08 Α + $1,000 / 1.08 20 = $1,196.36 Answers to End-of-Chapter Problems B-41
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P B = $100 10 0.08 Α + $1,000 / 1.08 10 = $1,134.20 6.13 The price of a share of stock is the PV of its dividend payments. Since a dividend of $2 was paid yesterday, the next dividend payment, to be received one year from today, will
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This note was uploaded on 11/02/2011 for the course ACTSC 371 taught by Professor Wood during the Fall '08 term at Waterloo.

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Chap6 - Chapter 6: How to Value Bonds and Stocks $1,000 /...

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