4. Your analysis leads you to believe that the price of Outel\'s stock should be

Question

4. Your analysis leads you to believe that the price of Outel's stock should be $40 per share. Its current market price is $30. a) If you do not believe that you have access to special information about the company, what would you do? b) If you are an analyst with much better than average information, what do you do? 5. Suppose you observe the following prices of zero-coupon bonds (pure discount bonds) that have no risk of default: Price per $1 of face value 0.97 0.92 Maturity Yield to Maturity 1 year 3.093% 2 years 1)What should be the price of a 2-year coupon bond (with $100 face value at maturity) that pays a 6% coupon rate, assuming coupon payments are made once a year starting one year from now? 2)Find the entry in the table. 3)What should be the yield to maturity of the 2-year coupon bond in Part a?

Explanation / Answer

a) Reconduct my analysis and the variables calculated and assumptions used to confirm the correctness of the analysis.

b) since the stock is underpriced you should buy the stock as it will reach its fundamental value in future at which you must realize your gains.

5. a) Pmt = 6

Fv = 100

I/Y = 3.093

Comput PV using BA 2 calculator

PV = 105.55

b) for Discount bonds :

Value = FV/(1+R)^2

R ={(1/0.92)^0.5}-1= 4%

c) YTM = 3.093

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