Moore Company is about to issue a bond with semiannual coupon payments, a coupon rate of 8%, and par value of $1,000. The yield-to-maturity for this bond is 10%.
a. What is the price of the bond if the bond matures in 5, 10, 15, or 20 years?
b. What do you notice about the price of the bond in relationship to the maturity of the bond?
A. Five years to maturity
INPUT 10 5 40.00 1000.00
KEYS N I/Y PV PMT FV
CPT -922.78
Ten years to maturity
INPUT 20 5 40.00 1000.00
KEYS N I/Y PV PMT FV
CPT -875.38
Fifteen years to maturity
INPUT 30 5 40.00 1000.00
KEYS N I/Y PV PMT FV
CPT -846.28
Twenty years to maturity
INPUT 40 5 40.00 1000.00
KEYS N I/Y PV PMT FV
CPT -828.41
B. The lengthier the maturity of a bond selling at a reduction, all else held persistent, the lesser the price of the bond!
Part B: The Crescent Corporation just paid a dividend of $2 per share and is expected to continue paying the same amount each year for the next 4 years. If you have a required rate of return of 13%, plan to hold the stock for 4 years, and are confident that it will sell for $30 at the end of 4 years, how much should you offer to buy it at today?
In this scenario we have an annuity of $2.00 for 4 year periods, followed by a lump sum of 30 to be discounted at 13% for respective number of 4 years: the answer should be -24.35
Part C: Use the information in the following table to answer the questions below.
State of Economy Probability of State Return on A in State Return on B in State Return on C in State
Boom .35 0.040 0.210 0.300
Normal .50 0.040 0.080 0.200
Recession .15 0.040 -0.010 -0.260
xxxxxxxx x
xxxxxxxx 2
Present Value Annuity xxxxxx (PVAF xxx xxx = (1 - 1/1.0625) / 0.06 x xxxxxxx
Price x xxxxxxx xxxxx x $500 x 12.7834 x xxxxxxxxx
xxxxxxxxx = $30,000 x [(1 - xxxxxxxxxxxx / 0.085] x $30,000 / xxxxxx
= $4,572.23
a. What is the expected return of each asset?
b. What is the variance of each asset?
c. What standard deviation of each asset?