Chapter 7

Chapter 7
1. The preferred stock of Koenig Industries pays a quarterly dividend of 8. The next dividend will
be paid in 3 months.
Using the dividend discount method and an annual effective yield rate of 12%, calculate the
price of Koenig preferred stock .
2. Snyder Pretzel Company has issued preferred stock that pays a quarterly dividend of D. The
next dividend will be paid later today.
The price of Snyder preferred stock prior to the payment of today’s dividend is 1000 assuming a
yield rate of 10% convertible quarterly.
Determine D.
3. Jenna buys the common stock of Morton Manufacturing for 5000 per share. Morton’s stock
pays a quarterly dividend of 140 per share. The dividend is expected to remain level and
continue forever. The next dividend is payable in three months.
Calculate the expected annual effective yield on Morton’s stock.
4. Thompson Corporation pays annual dividends. They will pay a dividend of 3 in one year on
earnings of 5 for the year. Thompson’s earnings are expected increase at a rate of 6% per year
with 60% of earnings paid as dividends.
Calculate theoretical price of the common stock to yield 10%.
5. The preferred stock of Gick Guttering Company pays annual dividends. The next dividend of 10
will be paid in one year. Each subsequent dividend thereafter will be 2 larger than the previous
dividend.
The preferred stock is purchased to yield 10% annually.
Calculate the price of preferred stock.
6. The preferred stock of Crosby Chocolate Factory pays an annual dividend of 5. The next
dividend will be paid in 5 months.
The stock is purchased to yield 8%.
Calculate the price of the stock.
October 29, 2014
7. The preferred stock of Banu LTD pays a quarterly dividend with the next dividend payable in 3
months. The quarterly dividends are 1 each quarter for the next year, 2 each quarter for the
second year, 3 each quarter for the 3rd year, etc.
The stock is purchased to yield 8% compounded monthly.
Calculate the theoretical price for Banu LTD preferred stock.
October 29, 2014
Chapter 8
Use the following spot yield curve for Problems 8-12:
Time
½
1
1½
2
2½
3
3½
4
Spot Rate
1.0%
1.5%
2.0%
2.5%
3.0%
4.0%
5.0%
6.0%
8. Calculate the price of a 2 year bond with a par value of 10,000. The bond matures for par and
has a coupon rate of 6% convertible semi-annually.
9. Calculate the present value of a four year annuity due with annual payments of 5000.
10. Two years from today, Rinat will receive 100,000. Three years from today, Rinat will receive
200,000.
How much will Rinat have four years from today?
11. Calculate the accumulated value of a 3 year annuity immediate with annual payments of 1000.
12. A four year bond matures for 5000 and has annual coupons of 125. The price of the bond is
calculated using the spot yield curve.
Determine the annual yield rate on the bond.
13. You are given the following yield curve:
Term (t)
1
2
3
4
Spot Rate
0.060
0.065
0.069
0.072
Calculate the 1 year deferred 3 year forward rate f(1,4).
October 29, 2014
14. You are given the following two bonds:
Term
1
2
Annual
Coupon
60
80
Maturity
Value
1000
1000
Price
1000.00
1055.06
Calculate the 2 year spot interest rate.
15. You are given the following spot yield curve:
t
rt
1
2
3
4
4.0%
3.5%
r3
r4
The present value of a four year annuity due of 100 is 379.05.
The price of a 4 year bond with a maturity value of 2000 and annual coupons of 50 is 1875.12.
Calculate the three year deferred one year forward interest rate.
October 29, 2014
Answers
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
278.38
24.39
11.68%
75
300
65.37
648.08
10,688.99
19,130.16
344,631.86
3178.90
5.88%
7.603%
5.0%
5.77%
October 29, 2014