Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
QUESTION ONE
- What are the main characteristics of a bond? Provide examples of different types of bonds in terms of coupons and maturity.
- Explain the difference between coupon rate and yield to maturity. Show, using examples, how changes in the coupon rate and yield to maturity affects the
bond price. - You are asked to put value on a bond which promises 8 annual coupon payments of £50 and will repay its face value of £1000 at the end of 8 years. You observe that other similar bonds have yields to maturity of 9%.
- How much is this bond worth?
- You are offered the bond for a price of £755.5, what yield to maturity does this represent?
- You believe that next year XYZ plc will pay a dividend of £2 on its common stock. Thereafter, you expect dividends to grow at a rate of 4% a year in perpetuity. If you require a return of 12% on your investment.
- How much should you be prepared to pay for the stock?
- Assuming that the expected stock price at the end of year 5 is £37.6, calculate the return on capital.
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