\ Judy Johnson is choosing between investing in two Treasury securities that mature in five years and have par values of $1,000. One is a Treasury note paying an annual coupon of 5.06 percent. The...

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Judy Johnson is choosing between investing in two Treasury securities that mature in five years and have par values of $1,000. One is a Treasury note paying an annual coupon of 5.06 percent. The other is a TIPS which pays 3 percent interest annually.

1. If inflation remains constant at 2 percent annually over the next five years, what will be Judy’s annual interest income from the TIPS bond? From the Treasury note?


2. How much interest will Judy receive over the five years from the Treasury note? From the TIPS?


3. When each bond matures what par value will Judy receive from the Treasury note?


4. After five years what is Judy’s total income(interest+par) from each bond? Should she use this total as away of deciding which bond to purchase?

P4
Assume a $1,000 face value bond has a coupon rate of 8.5 percent, pays interest semi-annually, and has an eight year life. If investors are willing to accept a 10.25 percent rate of return on bonds of similar quality what is the present value or worth of this bond?
P6
The Garcia Company’s bonds have a face value of $1,000 will mature in ten years and carry a coupon rate of 16 percent. Assume interest payments are made semi-annually.
P26
Mercier Corporation’s stock is selling for $95. It has just paid a dividend of $5 a share. The expected growth rate in dividends is 8 percent.

1. What is the required rate of return on this stock?


2. Using your answer a suppose Mercier announces developments that should lead to dividend increases of 10 percent annually. What will be the new value of Mercier’s stock?


3. Again using your answer to a suppose developments occur that leave investors expecting that dividends will not change from their current levels in the foreseeable future. Now what will be the value of Mercier stock?


4. From your answer to b and c how important are investors expectations of future dividend growth to the current stock price?