Purchase Solution

Valuing Stocks, Options and Bonds

Not what you're looking for?

Ask Custom Question

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%.

Purchase this Solution
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.

Solution Preview

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: ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Introduction to Finance

This quiz test introductory finance topics.

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

View More Free Quizzes
Related BrainMass Solutions

  • Portfolio risk; Derivatives

    The best (but still not 100% accurate way), is the market price (similar to what is used with stocks and collectables). It is the price people are willing to purchase them for.

  • Valuing Firms Stocks And Bonds In Excel

    88250 Valuing Firms Stocks And Bonds In Excel The meeting with Bob went well. Now Kim wants you to turn your focus to valuing the firm's stock and bonds.

  • Valuation

    The required return on stocks is 12%, and the dividend is expected to increase by 5% for the foreseeable future. The bonds you are valuing have 3 years to maturity, a 6% annual coupon, and a face value of US$1,000.

  • Cost of equity for American Express

    399313 cost of equity First, the cost of equity is often used in valuing the stocks of a company. Second, CAPM is stated as follows: Rj - RF = ?j [RM - RF] or Rj = RF + ?

  • Valuation of Bonds & Stocks

    Compare valuing preferred stock and common stock.

  • Risk of investments

    Thus options C) and D) are incorrect. Small company stocks are riskier than large company stocks; hence option E) is incorrect. Stocks are riskier than bonds; hence option B) is incorrect.

  • Valuation of a Stock and Bond

    The required return on stocks is 10%, and the dividend is expected to increase by 6% for the foreseeable future. The bonds you are valuing have 3 years to maturity, a 4% annual coupon, and a face value of US$1,000.

  • Efficient or optimal portfolio using beta as a selection measure

    1) the portfolio above 2) a portfolio with 33 common stock, 33 preferred stock and 33 Treasury Bonds 3) a portfolio with 33 common stock, 33 preferred stock and 33 Muni Bonds 4) a portfolio with 33 common stock, 33 foreign currencies and 33 stock options

  • Zero Coupon Bonds: Value of Option to Default on the Bonds

    a) If the assets are worth $150 million, what is the value of the stocks and the bonds? b) If the assets are worth $400 million, what is the value of the stocks and the bonds?

  • Convertibles vs. Warrants

    Warrants are generally privately issued and not traded on exchanges. Convertible bonds are bonds with warrants. If the bond holder wishes, he could trade in his bond for stocks (at a fixed rate).

View More Related Solutions