A lways (a) data input tables and (b) Excel functions whenever you can do so. 1.

Question

Always (a) data input tables and (b) Excel functions whenever you can do so.

1. Find the price today of a bond that has a 10 year life, 8.5% yield-to-maturity, and a 10% coupon.

2. For the bond above, solve for the YTM if the bond sells for $974 today.

3. Find the price today of a stock that is expected to pay a $2 dividend next year. Dividends are expected to grow at 4% for three years, then at 2.75 % for four years, and then 2% forever. The required return on the stock is 10%.

4. Suppose Tim needs $12,000 in 7 years and plans to raise this amount by investing $5,000 now, $2000 next year, and then an equal amount in years 3-6. Solve for the equal amount if he expects to earn 8% a year.

5. Jason has agreed to lend Keith $10,000 today if Keith promises to pay him back $15,200 in eight years. What interest rate is Jason charging Keith?

6. You would like to have $1.25 million in 30 years. How much money would you need to deposit into an account (a) in a single lump sum today, versus (b) a fixed amount each year in years 1 to 29 in order to reach this goal? Assume you can earn 7% each year.

7. For your assignmened firm (AAPL), calculate the beta and then the required return on the equity. Briefly describe HOW you calculated these numbers and what the adjusted R2 and the t-statistics on the regression mean.

Explanation / Answer

1)

price = 100 * [1-(1.085)^-10]/0.085 + 1000/1.085^10

= 1098.42

2)

974 = 100 * [1-(1+YTM)^-10]/YTM + 1000/(1+YTM)^10

YTM = 10.43%

3)

P7 = 2.459371683/0.1-0.02 = 30.74214603

price = 2/1.1 + 2.08/1.1^2 + 2.1632/1.1^3 + 2.222688/1.1^4 + 2.28381192/1.1^5 + 2.346616748/1.1^6 + 2.411148708/1.1^7 + 30.74214603/1.1^7

=26.44

5)

let r be the interestrate

15200 = 10000 * (1+r)^8

r = 5.37%

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