Week 4 Homework
Solutions: Problem Set 4
1. Determining Profit or Loss from an Investment. Three years ago, you purchased 150 shares of IBM stock for $88 a share. Today, you sold your IBM stock for $103 a share. For this problem, ignore commissions that would be charged to buy and sell your IBM shares.
a. What is the amount of profit you earned on each share of IBM stock? The profit on each share of IBM stock was $15. $103 priced when each share was sold, $88 priced when each share was purchased = $15. b. What is the total amount of profit for your IBM investment? The total profit for the IBM transaction was $2,250. $15 profit per share x 150 shares = $2,250.
2. Calculating Rate of Return. Assume
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(p. 457). 40.00/2.67 = 14.98 = 15 P/E Ratio. c. Calculate the book value of a share of Bozo Oil’s common stock. (p. 461). 9,000,000-5,000,000/750,000 = $5.33 per share.
4. Determining Interest and Approximate Bond Value. Assume that three years ago, you purchased a corporate bond that pays 9.5 percent. The purchase price was $1,000. Also assume that three years after your bond investment, comparable bonds are paying 8 percent. a. What is the annual dollar amount of interest that you will receive from your bond investment? The annual interest is $95. $1,000 9.5 percent = $95. b. Assuming that comparable bonds are paying 8 percent, what is the approximate dollar price for which you could sell your bond? The approximate dollar price would be $1,187.50. $95 annual interest ÷ 8 percent = $1,187.50 approximate. c. In your own words, explain why your bond increased or decreased in value. This bond increased in value because you owned a bond with a fixed interest rate of 9.5 percent during a time period when interest rates in the economy were declining.
5. Using Margin. Bill Campbell invested $4,000 and borrowed $4,000 to purchase shares in Wal-Mart. At the time of investment, Wal-Mart was selling for $45 a share. a. If Bill paid $30 commission, how many shares could Bill buy if he used only his own money and did not use margin? $4,000 -
Online Quiz Questions for Week 3 Topic: Term Structure Question: Assume that coupon interest is paid annually and all bonds have a face value of $100. Given the yields to maturity of the i) 1‐year 13% coupon bond, ii) 2‐year 11.5% coupon bond and iii) 3‐year 9% coupon bond are 10%, 9.5% and 9% respectively. Compute f(1,2), the interest rate of a 1‐year bond in 2 years’ time. Correct Answer: 7.88% Question: Suppose that all investors expect that interest rates on a 1‐year bond for the next 4 years will be as follows: Today interest rate for a 1‐year bond = 5% Forward rate for a 1‐year bond in 1 year = 7% Forward rate for a 1‐year bond in 2 years = 9% Forward rate for a 1‐year bond in 3
Jo Bower owns 150 shares of Data General stock. She purchased the stock for $24 a share. She sold her stock for $30 a share. The commissions required to buy and sell her stock totaled $120. Assuming that she received no dividends during the time she owned the stock, what is her total return for this transaction?
If Target issues 9% coupon bonds on 1/1/18 for $12,775,000 due 12/31/22 with semiannual interest payments on July 1st and December 31st, the company would receive $15,011,152 on the date of issuance (1/1/18). The present value of $15,011,152 was calculated using payments of $574,875 every 6 months, compounding for 10 periods, at the rate of 2.5% per period.
An inflation-indexed Treasury bond has a par value of $5,000 and a coupon rate of 7 percent. An investor purchases this bond and holds it for one year. During the year, the consumer price index decreases by 1.5 percent first six months of the year, and by 2.25 percent during the second six months of the year due to a deflation. What are the total interest payments the investor will receive during the year?
Assume that you are considering the purchase of a 15-year bond with an annual coupon rate of 9.5%. The bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
One year ago, you bought a $1000 face value, 6% annual coupon bond when it had 4 years left until maturity, and its yield-to-maturity was at 7%. Exactly one year later, the bond’s yield to maturity is now at 8.5%. What was your annual rate of return on the investment?
1-year note payable in exchange. Assuming 10% approximates the market rate of return, how much interest would be recorded for the year ending December 31 if the sale was made on June 30? PxRxT 1yr 80,000 x 10% = 8,000 x 6/12 = $4,000
13. Using the information provided in question #25, how much is recorded as realized gain at the time of sale if the security is classified as trading security?
Considering the following bond: Coupon Rate - 4% 5 year maturity Priced to yield -5% The value of the bond is as follows:
Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%. What is the current market price of these bonds?
In the final year of maturity, I will receive the principal of the bond and the coupon. Plus, when making these calculations and collecting data I have assumed that the bond is selling at par. All this means is that the bond will be sold for $100,000, which also means for the next five years I will have to give up the coupon payments of 4,250 if I do sell this bond.
Assume price you calculated is $1150. Find the current yield, capital gains yield, and total return on January 1, 1987. Explain what each of the calculated terms indicate.
Knowing that, the A - rated bond, which was required to issue for the purpose of raising five million dollars debt, had a coupon rate of 5.5%, a maturity of 15 years and one $1000 face value .
3. A Rs. 100 par value bond bears a coupon rate of 14 per cent and matures after 5 years. Interest is payable semi-annually. Compute the value of the bond if the required rate of return is 16 per cent?