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Week 7
(a) If the interest rate rises to 12.5%, then the value of the bond will decrease. The interest rate is inversely proportional to coupon value which means if coupon value is less than interest rate, the bond value will fall.
(b)
(i) Coupon Payment = Face value * Coupon rate * Number of years
Face Value = $1,000
Coupon rate = 10.5% per annum
Number of years = 20
Coupon payment for 20 years = $1000 * 10.5% * 20 = $2,100
Semi - annual coupon payment = $1,000 * 10.5%/2 = $52.5
(ii) Present value of bond =
Total Face Value * Present value factor at nyears for semiannual market rate
+
Semi Annual interest * Cumulative Present value factor at nyears for semi-annual market rate
Here n = 40 years (As interest is paid semi-annually)
Face value = $1,000
Semi-annual interest = $52.5 (calculated in i)
Semi - annual market rate = 4.25%
PV of 4.25% for 40 years = 0.1892
Cumulative PV 4.25% for 40 years = 19.0773
Therefore Present value = $1,000 * 0.1892 + $52.5*19.0773 = $189.2 + $1001.56 = $1,190.76
(iii) N = 20 Years
Face value = $1,000
Annual interest = $105
Market Rate = 8.5%
PV of 8.5% for 20 years = 0.1956
Cumulative PV 8.5% for 20 years = 9.4634
Therefore Present value = $1,000 * 0.1956 + $105*9.4634 = $195.6 + $993.66 = $1,189.26
Week 8
(a)
(i) There is an inverse relationship between share price and investor required rate of return. The required return will fall if the share price will rise as there is less risk of return and vice versa.
(ii) There is straightforward relationship between share price and dividend growth rate which means as the dividend rate increases the share price also increases as share price is nothing but future cash flows of dividends.
(b) Dividend paid every year = $2.85
Current market price = $77.32
Required rate of return = Dividend / Current market price
= 2.85/77.32 = .0369 or 3.69%
(c) Dividend = $3.25
Growth rate = 5.1%
Required rate of return = 11%
Share price = {Dividend * (1 + Growth Rate)} / Required rate of...