BUSN 379 Interest Rate Risk. Both Bond Bill and Bond Ted have
Question # 00344059
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Updated on: 07/23/2016 02:18 AM Due on: 07/23/2016
BUSN 379 Finance
Week 3 Homework
16. Interest Rate Risk. Both Bond Bill and Bond Ted have 7 percent coupons, make semiannual
payments, and are priced at par value. Bond Bill has 3 years to maturity, whereas Bond Ted has
20 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change
in the price of Bond Bill? Of Bond Ted? If rates were to suddenly fall by 2 percent instead, what
would the percentage change in the price of Bond Bill be then? Of Bond Ted? Illustrate your
answers by graphing bond prices versus YTM. What does this problem tell you about the
interest rate risk of longer-term bonds?
11. Valuing Preferred Stock. E-Eyes.com has a new issue of preferred stock it calls 20/20
preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid
until 20 years from today. If you require a return of 8 percent on this stock, how much should
you pay today?
12. Stock Valuation. Alexander Corp. will pay a dividend of $2.72 next year. The company
has stated that it will maintain a constant growth rate of 4.5 percent a year forever. If you
want a return of 12 percent, how much will you pay for the stock? What if you want a return
of 8 percent? What does this tell you about the relationship between the required return and
the stock price?
Week 3 Homework
16. Interest Rate Risk. Both Bond Bill and Bond Ted have 7 percent coupons, make semiannual
payments, and are priced at par value. Bond Bill has 3 years to maturity, whereas Bond Ted has
20 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change
in the price of Bond Bill? Of Bond Ted? If rates were to suddenly fall by 2 percent instead, what
would the percentage change in the price of Bond Bill be then? Of Bond Ted? Illustrate your
answers by graphing bond prices versus YTM. What does this problem tell you about the
interest rate risk of longer-term bonds?
11. Valuing Preferred Stock. E-Eyes.com has a new issue of preferred stock it calls 20/20
preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid
until 20 years from today. If you require a return of 8 percent on this stock, how much should
you pay today?
12. Stock Valuation. Alexander Corp. will pay a dividend of $2.72 next year. The company
has stated that it will maintain a constant growth rate of 4.5 percent a year forever. If you
want a return of 12 percent, how much will you pay for the stock? What if you want a return
of 8 percent? What does this tell you about the relationship between the required return and
the stock price?
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Solution: BUSN 379 Interest Rate Risk. Both Bond Bill and Bond Ted have