1) Look up 3 stocks that are in the same industry using Yahoo! Finance. Rank their P/E ratios from highest to lowest (be sure to label it!). Suppose a new competitor appears whose earnings are $0.50 per share. Using the ratios method we learned in class, what should its stock price be?

2) A 10-year US Treasury bond with a face value of $10,000 pays a coupon of 5.5% (2.75% of face value every 6 months). The semiannually compound interest rate is 5.2% (a six-month discount rate of 5.2/2 = 2.6%). What is the present value of the bond?

3) The formula for the duration of a perpetual bond that makes an equal payment each year in perpetuity is (1+yield) / yield.

a. If each bond yields 5%, which has the longer duration - a perpetual bond or a 15-year zero coupon bond?

b. Same as part a, but what if the yield is 10%?

4) In early 2012, Aaa bonds yielded 5.3% and Baa bonds yielded 5.9%. If some bad news causes a 10% five-year bond to be unexpectedly downrated from Aaa to Baa, what would be the effect on the bond price? Assume annual coupons.

5) Suppose that you buy a two-year 8% bond at its face value. What will be your nominal return over the two years if inflation is 3% in the first year and 5% in the second year? What will be your real return?

6) Consider the following three stocks:

a. Stock A is expected to provide a dividend of $10 per share forever

b. Stock B is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 4% forever.

c. Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 20% a year for 5 years (i.e., until year 6) and zero thereafter.

If the market capitalization rate for each stock is 10%, which stock is the most valuable? What if the capitalization rate is 7%?