Problem 1: Midland Oil has $1,000 par value bonds outstanding at 11 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is:
a) 6 percent
b) 8 percent
c) 12 percent
Problem 2: Harrison Ford Aoto Company has a $1,000 par value bond outstanding that pays 11 percent interest. The current yield to maturity on each bond in the market is 8 percent. Compute the price of these bonds for these maturity dates:
a) 30 years
b) 15 years
c) 1 year
Problem 3: Tom Cruise Lines, Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 12 percent. This return was in line with the required returns by bondholders at that point described below:
Real rate of return............ 3%
Inflation premium............. 5
Risk premium................. 4
Total Return............... 12%
Assume that 5 years later the inflation premium is only 3 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. Compute the new price of the bond.
The preferred stock of Ultra Corporation pays an annual dividend of $6.30. It has a required rate of return of 9 percent. Compute the price of the preferred stock.