Intermediate Finance Assignment

1. A 16-year U.S. Treasury bond with a face value of $1,000 pays a coupon of 5.75%. Coupon is to be paid semi-annually. The reported annual yield to maturity is 5.4%. Solve the following questions:
   1. a) What is the present value of the bond?
   2. b) What is the duration of the bond?
   3. c) If the yield to maturity changes to 1%, what will be the present value?
   4. d) If the yield to maturity changes to 8%, what will be the present value?
   5. e) If the yield to maturity changes to 15%, what will be the present value?
2. The 7.9%, ten-year bond yields 5.9%. If this yield to maturity remains unchanged, what will be its price one year hence? Assume annual coupon payments and a face value of $1,000. What is the total return to an investor who held the bond over this year?
3. A government bond matures in 4 years, makes annual coupon payments of 5.9% and offers a yield of 3.9% annually compounded. Assume face value is $1,000.
   1. a) Suppose that one year later the bond still yields 3.9%. What return has the bondholder earned over the 12-month period?
   2. b) Now suppose that the bond yields 2.9% at the end of the year. What return did the bondholder earn in this case?
4. Assume coupons are paid annually. Here are the prices of three bonds with 10-year maturities. Assume face value is $100.

Bond Coupon (%)Price (%)

3 87.00

5 106.00

9 137.00

a) What is the yield to maturity of each bond?

b) What is the duration of each bond?

5. A bond’s credit rating provides a guide to its price. Assume Aaa bonds yield 3.7% and Baa bonds yield 4.7%. Assume a 10% five-year bond with annual coupons and a face value of $1,000.

a) What is the bond’s price if it is rated as Aaa?

b) What is the bond’s price if it is rated as Baa?

6. Company Z’s earnings and dividends per share are expected to grow indefinitely by 2% a year. If next year’s dividend is $7 and the market capitalization rate is 11%, what is the current stock price?

7. Pharmecology just paid an annual dividend of $1.70 per share. It’s a mature company, but future EPS and dividends are expected to grow with inflation, which is forecasted at 4.50% per year. The nominal cost of capital is 11.25%.

a) What is Pharmecology’s current stock price?

b) What would be Pharmecology’s current stock price using forecasted real dividends and a real discount rate?

8. Consider the following three stocks:

• ▪ Stock A is expected to provide a dividend of $11.10 a share forever.
• ▪ Stock B is expected to pay a dividend of $6.10 next year. Thereafter, dividend growth is expected to be 5.00% a year forever.
• ▪ Stock C is expected to pay a dividend of $4.90 next year. Thereafter, dividend growth is expected to be 21.00% a year for five years (i.e., years 2 through 6) and zero thereafter. If the required rate of return for each stock is 11.00%, what is the stock price for each of the stocks?

9. Phoenix Corp. faltered in the recent recession but is recovering. Free cash flow has grown rapidly. Forecasts made in 2019 are as follows: