1.
What is the present discounted value of a coupon bond that pays $100
in one year and then a face value of $500 in two years time if the interest rate
is 0.10?
PDV = 100/1.1 + 500/(1.1)^2 = 90.91 + 413.22= 504.13
2.
Suppose that we live in a world of complete certainty.
The interest
rate is known to be 5% and will be that forever. A particular company, Mantar
Inc, promises to pay a dividend equal to $8 every year, forever. It is known that
Mantar will pay this dividend and it will never change.
a.
What will shares for Mantar Inc sell for?
Share price = 8/.05 = $160
b.
What if the interest rate were 7% instead of 5%? What would be the
share price.
Share price = 8/.07 = $114.29
c.
Suppose that instead of paying $8 forever, Mantar Inc.
will pay $8
the °rst year, $10 the second year, and $15 from then on.
a.
What will be the price of a share of Mantar Inc?
Share price = 8/1.05 + 10/(1.05)^2 + (1/(1.05)^2)*(15/.05)= 7.62+ 9.07+272.11
= $288.80
What will be the share price in exactly one year (after the $8 dividend is
paid)?
Share price in one year = 10/(1.05) + (1/1.05)*(15/.05)=9.52+285.71=295.23
b.
What will be the share price in exactly two years?
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 Fall '08
 GORDANIER
 Economics, Supply And Demand, $2, $10, $15

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