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Valuing Stocks, Options and Bonds

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1. Valuation - zero-coupon bond
A U.S. Government bond with a face amount of $10,000 with 8 years to maturity is yielding 3.5%. What is the current selling price?

2. Valuation - options
The following information refers to a six-month call option on the stock of XYZ, Inc.

Price of the underlying stock: $50
Strike price of the three-month call: $45
Market price of the option: $10

a) What is the intrinsic value of the option?
b) What is the option's time premium at this price?

3. Valuation - corporate bond
A $1,000 corporate bond with 20 years to maturity pays a coupon of 7% (semi-annual) and the market required rate of return is a) 6.6% b) 13%. What is the current selling price for a) and b)?

4. Valuation - Constant growth - common stock.
What is the value of a share of common stock that paid $2.00 last year, the growth rate is 8%. Assume the risk free rate is 4%, the market return is 10% and the Beta is 1.5.

5. Valuation - preferred stock
What is the value of a share of preferred stock that pays a $9.50 dividend? Assume k is 12%.

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Solution Summary

There are five problems. These problems apply different models of valuation. Solutions to given problems describe the methodology to estimate the fair value of option, bond and stock as the case may be.

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1. Valuation - zero-coupon bond
A U.S. Government bond with a face amount of $10,000 with 8 years to maturity is yielding 3.5%. What is the current selling price?

Face Value of bond=M=$10,000
Number of periods=n=8 years
Yield=k=3.5%
Current selling price=M/(1+k)^n=10000/(1+3.5%)^8=$7594.12

2. Valuation - options
The following information refers to a six-month call option on the stock of XYZ, Inc.
Price of the underlying stock: $50
Strike price of the three-month call: $45
Market price of the option: ...

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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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