Question

28) 28) Recently, you discovered a convertible, callable bond with a semiannual coupon of 5 percent. If you purchase this bond you will have the right to: A) convert the bond into equity shares. B) defer all taxable income until the bond matures. C) force the issuer to repurchase the bond prior to maturity, D) have the principal amount adjusted for inflation. E) convert the bond into a perpetuity paying 5 percent. 29) 29) Next year, Jensen's will pay an annual dividend of $3.32 per share. The company has been reducing its dividends by 7 percent annually. What is this stock worth today if the required return is 15.5 percent? A) S16.92 B ) $25.87 C) $39.06 D) $38.33 E) $14.76 30) 30) You will receive $4,000 at graduation 3 years from now. You plan on investing this money at 5 percent annual interest until you have accumulated $50,000. How many years from today will it be when this occurs? A) 51.42 years B) 48.42 years C) 54.77 years D) 51.77 years E) 49.08 years 31) 31) The Friendly Bank wants to cam an EAR of 12 percent on its consumer loans. The bank uses daily compounding. What rate is the bank most apt to quote on these loans? A) 11.76 percent B) 11.33 percent C) 12.12 percent D) 11.38 percent E) 12.00 percent 32) 32) You purchased an investment that will pay you $8,000, in real dollars, a year for the next three years. Each payment will be received at the end of the period with the first payment occurring one year from today. The nominal discount rate is 8.46 percent and the inflation rate is 3.1 percent. What is the present value of these payments in real dollars? A) $18,529 B) $18,811 C) $21,705 D) $20,720 E) $20,447

Answer 1

	28)	Convertible Bond gives the right to the purchaser to convert the bond into specified number of shares
		ANSWER: A)
		Convert the bond into equity shares
	29)	D1=Next year's dividend	$3.32
		R=Required Return=15.5%=	0.1550
		g=Annual growth rate of dividend =-7%	-0.07
		Current Worth of stock=P0=D1/(R-g)	$14.76	(3.32/(0.155+0.07)
		ANSWER: E; $14.76
	30)
	Pv	Amount received after 3 years	$4,000
	Rate	Annual interest rate	5%
	Fv	Future Value accumulated	$50,000
	NPER	Number of years after receipt of $4000	51.767168	(Using NPER function with Rate=5%,Pv=-4000,Fv=50000)
		Number of years from today=51.77+3=	54.77
		ANSWER: C)54.77 Years
	31)	EAR=12%
		Normally quotes are APR
		Assume quoted APR=X with daily compounding
		Daily Compounding rate=X/365
		Effective annual rate=EAR=((1+(X/365))^365)-1
		((1+(X/365))^365)-1=12%=0.12
		(1+(X/365))^365=1.12
		(1+(X/365))=1.12^(1/365)=	1.0003105
		X/365=1.00031-1=	0.0003105
		X=0.00031*365=	0.1133463
		X=Rate Quoted by the Bank=	11.33%
		ANSWER:B) 11.33%
	32)	Present Value of payment =Payment/((1+i)^N)
		i=nominal discount rate=8.46%=0.0846
		N=Year of payment
		Inflation Rate =3.1%=0.031
		CF1=Payment in nominal dollar in year1	$8,248	(8000*1.031)
		CF2=Payment in nominal dollar in year2	$8,504	(8248*1.031)
		CF3=Payment in nominal dollar in year3	$8,767	(8504*1.031)
		N	CF	PV=CF/(1.0846^N)
		Year	Nominal	Present
			Payment	Value
		1	$8,248	$7,605
		2	$8,504	$7,229
		3	$8,767	$6,872
			SUM	$21,705
		Present Value of payments	$21,705
		ANSWER: C.$21,705