Principles of Finance, Exam 3 Practice Questions

1. A 12% corporate five year semi-annual coupon bond that has a nominal yield of 8% would be priced at?

2. What is the value of a 20 year semi-annual 9% Treasury bond that has a nominal yield of 5%?

3. What would be your return if you held a 10% 20 year annual Treasury coupon bond when yields fell from 7 to 5% over the "year"? I.E. You buy the bond now and sell it next year.

4. If a perpetuity pays $100 a year and yields are 9%, how much is this bond worth?

5. If a perpetuity that pays $75 a year is priced at $900, what is its yield?

6. What is the value of a 15 year bond that pays $30 every 6 months and is yielding 8%?

7. If you bought a 30 year zero coupon bond when it was yielding 12% and sold it 15 years later when it was yielding 14%, how much did you make or lose? What was your annualized return?

8. If you bought a 10 year 9% annual coupon bond yielding 9%, how much money did you make or lose if you sold it 4 years later when the bond was yielding 6%? What was your annualized return?

9. If the current dividend is $2.50, the growth rate is 5% and the cost of capital is 7%, what should be the price of this stock?

10. If next years dividend is $5 with a growth rate of 3% and a cost of capital of 9%, what should the price of the stock be?

11. Using question 10, what would the price of the stock be 5 years from now?

12. If the current dividend is $1 and the company is reducing dividends by 4% per year, what should the price of the stock be with a cost of capital of 4%?

13. If you buy a 10 year zero percent Treasury bond yielding 5%, how much could you sell the bond for 9 years from now?

14. What must be the growth rate of a stock that is selling for $50, has a cost of capital of 12%, and a current dividend of $2?

15. What must be the growth rate of a stock that is selling for $50, has a cost of capital of 12%, and whose dividend next year is expected to be $2?
Key
1. $1162.22
2. $1502.05
3. $286.44+100
4. 1111.11
5. 8.3%
6. 827.08
7. 106.72, 10.04% from 140.09/33.38 to the 1/15 power
8. Bought for $1,000, receive four $90 coupons and sell for $1147.52, made $507.52.. The yield is PV= -1000, FV = 1147.52, Pmt = 90, n=4, solve for I/y which equals 12.08%.

9. 131.25
10. 83.33
11. 96.61
12. 12
13. 952.38
14. P₀ = D₀(1+g)/(k-g), solve out for g and plug the numbers in. To start, P_ok – P₀g = D₀ + D₀g or g = (P_ok - D₀) /(D_o + P_o), Answer is 7.69%.
15. 8%