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Stocks Question and Answers
Stocks Question and Answers
x= 80/.07 = $1,142.86
4. Bond Pricing. A 6-year Circular File bond pays interest of $80 annually and sells for
$950. What are its coupon rate, current yield, and yield to maturity?
Coupon rate = 80/1000 = 8%
Current yield = 80 950 = 8.42%
Yield to maturity =
950 = 80 * ((1/r)- (1/(r*(1+r)^6)))+ (1000/(1+r)^6)
In calcN = 6, PV = -950, PMT = 80, FV = 1000
= 9.119%
7.Coupon Rate. General Matters outstanding bond issue has a coupon rate of 10
percent and a current yield of 9.6 percent, and it sells at a yield to maturity of 9.25
percent. The firm wishes to issue additional bonds to the public at face value. What
coupon rate must the new bonds offer in order to sell at face value?
The yield to maturity = coupon rate, so the new bond needs to be 9.25 to sell
at face value.
12. Bond Pricing. A 30-year maturity bond with face value of $1,000 makes annual
coupon payments and has a coupon rate of 8 percent. What is the bonds yield to
maturity if the bond is selling for
1. $900? N=30, FV=1000, PMT = 80, PV = -900 I/YR = 8.9708%
2. $1,000? N=30, FV=1000, PMT = 80, PV = -1000 I/YR = 8%
3. $1,100? N=30, FV=1000, PMT = 80, PV = -11000 I/YR = 7.1796%
25. Real Returns. Suppose that you buy a 1-year maturity bond for $1,000 that will
pay you back $1,000 plus a coupon payment of $60 at the end of the year. What real
rate of return will you earn if the inflation rate is
1. 2 percent? (1.06/1.02) 1 = 0.039215686 = 3.92%
2. 4 percent? (1.06/1.04) 1 = 0.019230769 = 1.92%
3. 6 percent? (1.06/1.06) 1 = 1%
4. 8 percent? (1.06/1.08) 1 = -0.018518519 = -1.85%
.12 = 8/66.67 + g
.12 = .12 + g
g=0
Therefore the capital yield gain is 0.
13. Constant-Growth Model. Gentleman Gym just paid its annual dividend of $3 per
share, and it is widely expected that the dividend will increase by 5 percent per year
indefinitely.
What price should the stock sell at? The discount rate is 15 percent.
Price = Dividend (rate growth rate)
P = 3 * 1.05 /(.15 - .05) = $31.50
Note: Multiply the dividend by 1.05 because the growth rate of .05 applies to
the Div1 for the current years growth.
How would your answer change if the discount rate were only 12 percent? Why
does the answer change?
P = 3 * 1.05 /(.12 - .05) = $45
The less that the discount rate is, the less the denominator becomes which
cause the dividend to increase.
17.Negative Growth. Horse and Buggy Inc. is in a declining industry. Sales, earnings,
P = 18.095 = $18.10
What is the dividend yield?
DIV/Price = 1/18.10 = .05524 = 5.5%
32. Interpreting the Efficient-Market Theory. How would you respond to the following
comments?
Efficient market, my eye! I know lots of investors who do crazy things.
Although what investors do may appear to be crazy, in fact, the steps taken
must reflect all available information in order for the investment to be worth
while.
Efficient market? Balderdash! I know at least a dozen people who have made a
bundle in the stock market.
Okay, but how many have lost a bundle especially in our current market?
The trouble with the efficient-market theory is that it ignores investors
psychology.
The concept of investor psychology is not a solid concept to describe investor
behavior. In fact, the term may be interpreted in a variety of ways. Anyone
that attempts to use this approach to investing is taking substantial risk.