Chapter 06 - Measuring and Calculating Interest Rates and Financial Asset PricesProblems and Issues1.Suppose a 10-year bond is issued with an annual coupon rate of 8 percent when the market rate of interest is also 8 percent. If the market rate rises to 9 percent, what happens to the price of this bond? What happens to the bond’s price if the market rate falls to 6 percent? Explain why?
2.Preferred stock for XYZ Corporation is issued at par $50 per share. If stockholders are promised an 8 percent annual dividend, what was the stock’s dividend yield at time of issue? If the stock’s market price has risen to $60 per share, what is its dividend yield?
3.You plan to borrow $2,000 to take a vacation and want to repay the loan in a year. The banker offers you a simple interest rate of 12 percent with repayments in two equal installments, 6 months and 12 months from now. What is your total interest bill? What is the APR? Would you prefer an add-on interest rate with one payment at the end of the year? If the bank applied the discount method to your loan, what are the net proceeds of the loan? What is your effective rate of interest rate?