Stock and Bond Practice Problems
1. You are evaluating a 9% coupon corporate bond with a face value of $1000. The
bond matures in six years. The yield to maturity is 6.8% and the coupon is paid
annually.
a. What should be the current price of the bond?
b. Draw the timeline for this bond, showing current price, coupon payments,
face value, years to maturity and yield to maturity.
2. The E. Harris Company issued bonds on February 1, 1992. When issued, the bonds
had 20 years to maturity, a coupon rate of 7.5% and sold for their face value of
$1,000. Now, on February 1, 2002, the bond price has risen to $1,110.40. What is
the current yield to maturity (assume that the bonds make annual coupon
payments)?
3. Suppose you are asked to analyze three bonds. Bond A matures in 1 year, Bond B
matures in 5 years, and Bond C matures in 15 years. Each of the three bonds has a
coupon rate of 6% (paid annually) and a yield to maturity is 3.8%.
a. What is the current market price for each bond?
b. Compute a new market price for Bond A, Bond B and Bond C at the following
two yields to maturity: YTM = 5% and YTM = 10%.
c. Draw a graph showing the prices of these bonds at the different yields. Put all
the bonds on the same graph, and show one line on the graph for each bond.
Put price on the y-axis and YTM on the x-axis. Make sure to clearly label your
graph so that it shows the relationship between bond prices and yields
d. Based on your graph, clearly describe the relationship between time to
maturity and the sensitivity of bond prices to rate fluctuations.
4. Consider a bond with a face value of $1,000, currently selling for $1,349.96, and
maturing in 11 years. If this bond pays coupons semiannually and its yield to
maturity is 4.03%, what is the coupon rate?
5. Suppose that you want to determine the fair price today for the shares of stock in
Coulthard, Inc., and you believe the return on this stock should be 16%. The stock
just paid an annual dividend of $2 per share, and that amount is expected to
increase 5% per year indefinitely. What should today’s price be?
6. Despite advice from your mother, you have joined a dot-com startup. The company
currently pays no dividend, but it has announced its intent to pay a dividend of $3 per
share three years from now and $4 per share the year after that. From then on,
dividends are expected to grow at an annual rate of 8%. If the forecasted future
dividends are assumed to be correct and if the required return on the stock is 22%,
compute the implied value of a share of this stock today.
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7. Thanks to an unexpected inheritance, a trust fund will be established to pay you and
your heirs $16,000 per year, at the end of each year, forever! The payments will start
exactly four years from today. If you use an annual discount rate of 8%, what is the
present value of the stream of cash flows?
8. The stock of ACDC Heavy Metals, Inc. just paid a dividend of $2 per share. Annual
dividends are projected to grow 15% per year for the next three years, after which
they will grow at a constant rate of 4% per year forever. If the required return on the
stock is 16%, what should be the price per share today?
9. Suppose the stock of Haakinen, Inc. pays an annual dividend, and that dividend is
expected to grow at the rate of 5% per year. Last year’s dividend was $4 per share. If
the stock currently is selling for $140 per share, what required return has the market
placed on this stock?
10. What is the yield to maturity of a zero coupon bond selling for $493.63, with nine
years to maturity? Assume semiannual compounding.
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