1)A $100 bond payable in a year sells for $97.56. What is the yield to maturity?

Question

1)A $100 bond payable in a year sells for $97.56. What is the yield to maturity?

2)Sam promises to pay Joe $1,904 in a year if Joe gives him $1,498 today. What interest rate is Sam paying and what interest rate Joe is earning?

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Use the one-period valuation model P = E/(1 + k) + P1/(1 + k) to price the following stocks (remember to decimalize percentages).

Use the Gordon growth model P = E × (1 + g)/(k g) to value the following stocks (remember to decimalize percentages).

Dividends (E = $) Required return (k = %) Expected price next year (P1 = $) Answer: price today (P = $) 1.00 10 20 19.10 1.00 15 20 18.26 1.00 20 20 17.50 0 5 20 19.05 0 5 30 28.57 0 5 40 38.10 1.00 10 50 46.36 1.50 10 50 46.82 2.00 10 50 47.27 0 10 1 0.91

Explanation / Answer

1. Yield to Maturity = Rate of Interest which discounts $ 100 after 1 year to $ 97.56 i.e. 1 - ( 100 / 97.56) = 2.5%

2. Interest rate is similar to above answer 1 i.e. 1 - (1,904 / 1,498 ) = 27.10% This is interest rate which Sam is paying & Joe is earning.

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