Anna is considering investing in a bond currently selling in the market for 875 EURO. The bond has four years to maturity, a 1000 EURO face value and a 7% coupon rate. The next annual interest payment is due one year from today. The appropriate discount rate for the securities of similar risk is10%. Estimate the intrinsic value of the bond. Based on the result of this estimation, should Ann purchase the bond? Explain. ii.Estimate the yield-to-maturity of the bond. Based on the result of this estimation, should Ann purchase the bond? Explain.
Anna is considering investing in a bond currently selling in the market for 875 EURO. The bond has four years to maturity, a 1000 EURO face value and a 7% coupon rate. The next annual interest payment is due one year from today. The appropriate discount rate for the securities of similar risk is10%.
- Estimate the intrinsic value of the bond. Based on the result of this estimation, should Ann purchase the bond? Explain.
ii.Estimate the yield-to-maturity of the bond. Based on the result of this estimation, should Ann purchase the bond? Explain.
QUESTION 4
The callable bond has a par value of 100 LT, 8% coupon rate and five years to maturity. The bond makes annual interest payment. Investor purchased this bond for 90 LT when it was issued in May 2008.
- What is the yield-to-maturity of this bond?
ii.What is the duration of this bond if currently its market price is 95 LT?
QUESTION FIVE
Bond with face value of 1000 EURO, 2 years’ time to maturity and 10 % coupon rate, makes semiannual coupon payments and provides 8% yield-to-maturity.
- a) Calculate the price of the bond.
- If the yield-to-maturity would increase to 9%, what will be the price of the bond? How this change in the yield-to-maturity would influence
bond price ?
QUESTION SIX
The new little known firm is analyzed from the prospect of investments in its shares by two friends. The firm paid dividends last year 3 EURO per share. Tomas and Arnas examined the prices of similar stocks in the market and found that they provide 12 % expected return. The forecast of Tomas is as follows: 4 % of growth in dividends indefinitely. The forecast of Arnas is as follows: 10% of growth in dividends for the next two years, after which the growth rate is expected to decline to 3 % for the indefinite period.
a)What is the intrinsic value of the stock of the firm according to Tomas forecast?
b)What is the intrinsic value of the stock of the firm according to Arnas forecast?
c)If the stocks of this firm currently are selling in the market for 40 EURO per share, what would be the decisions of Tomas and Arnas, based on their
QUESTION 7
If the intrinsic value for the stock is 8 Euro and the market price for this stock is 9 Euro, then:
1.Stock is over valuated and could be good investment;
2, Stock is over valuated and isn‘t good investment;
3.Stock is under valuated and could be good investment;
4.Stock is under valuated and isn‘t good investment.
Question 8
Common stock hasn‘t term to maturity. How then can a stock that does not pay dividends have any value? Give an examples of such firms listed in the domestic market of your country.
Question 9
Firm currently pays a dividend of 4 EURO per share. That dividend is expected to grow at a 5 % rate indefinitely. Stocks with similar risk provide a 10 % expected return. Estimate the intrinsic value of the firm’s stock based on the assumption that the stock will be sold after 2 years from now at its expected intrinsic value.
Question 10
The categories of stocks most widely used in the selection process and relevant in the formation and management of the stock portfolios. are: blue chip stocks; income stocks; cyclical stocks; defensive stocks; growth stocks; speculative stocks; penny stocks. Explain each category
QUESTION 11
A UK retailer is considering opening a new store in Germany with the following details:
|
Company |
|
|
Initial cash outlay £ |
40,000 |
|
Salvage value £ |
0 |
|
Earnings before |
|
|
£ |
|
|
Year 1 |
2,000 |
|
Year 2 |
4,000 |
|
Year 3 |
1,000 |
|
Year 4 |
2,000 |
|
Year 5 |
1,000 |
The project will involve an initial investment of $20,000 (net of issue costs), which will produce annual Earnings before depreciation and taxes for 5 years as follows. At the end of this time it will have no scrap value.
However, if the first store is opened then the firm would gain the option to open a second store (an option to expand). Suppose this would have the following details. Timing (t): 5 years’ time, Estimated cost (Pe) : €40m,
Use Black-Scholes model to value the call option of the second store
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