Part -1:
1. You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that one-year T-bills are currently earning 3.25 percent. Your broker has deter¬mined the following information about economic activity and Moore Corporation bonds:
Real interest rate = 2.25%
Default risk premium = 1.15%
Liquidity risk premium = 0.50%
Maturity risk premium = 1.75%
a. What is the inflation premium?
b. What is the fair interest rate on Moore Corporation 30-year bonds?
2. The current one-year Treasury-bill rate is 5.2 percent and the expected one-year rate 12 months from now is 5.8 percent. According to the unbiased expectations theory, what should be the current rate for a two-year Treasury security?
3. Calculate the present value of $5,000 received five years from today if your investments pay
a. 6 percent compounded annually
b. 8 percent compounded annually
c. 10 percent compounded annually
d. 10 percent compounded semiannually
e. 10 percent compounded quarterly
What do your answers to these questions tell you about the relation between present values and interest rates and between present values and the number of compounding periods per year?
4. Compute the present values of the following first assuming that payments are made on the last day of the period and then assuming payments are made on the first day of the period:
| Payment |
Years |
Interest Rate |
Present Value (Payment made on last day of period) |
Present Value (Payment made on first day of period) |
| $678.09 |
7 |
13% |
|
|
| 7,968.26 |
13 |
6 |
|
|
| 20,322.93 |
23 |
4 |
|
|
| 69,712.54 |
4 |
31 |
|
|
5. What is the future value of $950 paid on the last day of each 6 months for 12 years assuming an interest rate of 11 percent compounded semiannually?
6. If a house valued at $150,000 grows to a value of $270,000 in seven years, what annual return did it earn?
Part -2:
Internet research - what are the current CD yields for 3mo, 6mo, 1 yr, 3yr and 5 yr CD's? What does this yield curve tell you? (internet research - bankrate.com)
Part -3:
1. You bought a bond five years ago for $935 per bond. The bond is now selling for $980. It also paid $75 in interest per year, which you reinvested in the bond. Calculate the realized rate of return earned on this bond.
2. Johnson Motors's bonds have 10 years remaining to matu-rity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon rate is 8 percent. The bonds have a yield to maturity of 9 percent. What is the current market price of these bonds?
3. A 10-year, 12 percent semiannual coupon bond, with a par value of $1,000 sells for $1,100. What is the bond's yield to maturity?
4. A bond you are evaluating has a 10 percent coupon rate (compounded semiannually), a $1,000 face value, and is 10 years from maturity.
a. If the required rate of return on the bond is 6 percent, what is its fair present value?
b. If the required rate of return on the bond is 8 percent, what is its fair present value?
c. What do your answers to parts (a) and (b) say about the relation between required rates of return and fair values of bonds?
5. Calculate the fair present value of the following bonds, all of which have a 10 percent coupon rate (paid semiannually), face value of $1,000, and a required rate of return of 8 percent.
a. The bond has 10 years remaining to maturity.
b. The bond has 15 years remaining to maturity.
c. The bond has 20 years remaining to maturity.
d. What do your answers to parts (a) through (c) say about the relation between time to maturity and present values?
6. A preferred stock from Hecla Mining Co. (HLPRB) pays $3.50 in annual dividends. If the required return on the preferred stock is 6.8 percent, what is the value of the stock?