Muse Use Excel(for Q1) and show formula. AND For Q2 excel not required.
1) Suppose you buy a bond that will pay $1000 in ten years along with an annual coupon payment of $50 and the interest rate is 4%. Answer the following questions:
a) What is the value of this bond?
b) Now suppose the bond has no coupon payments (it is a “zero coupon” bond) but still pays $1000 in ten years. What is the value of this bond?
c) What would happen to the value of the bond if the inflation rate unexpectedly goes up? What the bond value increase or decrease?
d) Now suppose the bond still pays an annual coupon of $50 but the interest rate drops to 2%. What is the new value of this bond?
2) The XYZ Corporation pays a dividend of $1 for each share and its required rate of return is 8%. Answer the following questions:
Assuming zero growth in dividends, what is the value of each share?
Now assume a 4% annual growth rate in the dividend paid. What is the value of each share?
Assume the growth rate is still 4%, but the required rate of return drops to 6%. What is the new value of each share?