1. 10 years ago ABC corporation issued a 20-year bond with $1000 par value, semiannual coupon payment, 10% coupon rate at YTM=10%. What was the price of the bond at issuance?
Today, you check the price of that bond in the market and you realize the bond is trading at $1050. What is the current YTM of the bond? Compare the current YTM and the YTM at issuance and give at least one reason that could cause the change in YTM. (Hint: to calculate the current YTM, you need to use “rate” function in Excel)
2. Anderson Motors, Inc. has just set the company dividend policy at $0.50 per year. The company plans on being in business forever. What is the price of this stock if an investor wants a 5% return?
3. How would you answer to the previous question change if an investor plans to hold the stock for 5 years and then sells it for $20?
4. King Waterbeds has an annual cash dividend policy that raises the dividend each year by 4%. Last year’s dividend was $0.40 per share. What is the price of this stock if an investor wants a 5% return?
5. How would you answer to the previous question change if an investor plans to hold the stock for 7 years and then sells it for $40?
6. Fenway Athletic Club plans to offer its members preferred stock with a par value of $100 and a 6% annual dividend rate. What price should these members be willing to pay for the returns they require 10% return on this investment?