Annuity, Stock price
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1) I recently inherited some bonds (face value $100000) from my father, and soon thereafter I became engaged to Tom Mad, a University of Canada marketing graduate. Tom wants Jill to cash in the bonds so the two of them can use the money to live like royalty for two years in the Bahama. The 2 percent annual coupon bonds mature on December 31, 2022, and it is now January 1, 2003. Interest on these bonds is paid annually on December 31 of each year, and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent. If Jill sells her bonds now and puts the proceeds into an account that pays 10 percent compounded annually, what would be the largest equal annual amounts she could withdraw for two years, beginning today (that is, two payments, the first payment today and the second payment one year from today)?
2) I recently took a company public through an initial public offering. I am expanding the business quickly to take advantage of an otherwise unexploited market. Growth for my company is expected to be 40 percent for the first three years and then I expect it to slow down to a constant 15 percent. The most recent dividend (Do) was $0.75. Based on the most recent returns, my company's beta is approximately 1.5. The risk-free rate is 8 percent and the market risk premium is 6 percent. What is the current price of my stock?
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Solution Summary
Calculates the value of annuity and stock price.
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1) I recently inherited some bonds (face value $100000) from my father, and soon thereafter I became engaged to Tom Mad, a University of Canada marketing graduate. Tom wants Jill to cash in the bonds so the two of them can use the money to live like royalty for two years in the Bahama. The 2 percent annual coupon bonds mature on December 31, 2022, and it is now January 1, 2003. Interest on these bonds is paid annually on December 31 of each year, and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent. If Jill sells her bonds now and puts the proceeds into an account that pays 10 percent compounded annually, what would be the largest equal annual amounts she could withdraw for two years, beginning today (that is, two payments, the first payment today and the second payment one year from today)?
First we need to find the market value of the bonds
No of years to maturity= 20 years
To calculate the price of the bond we need to calculate / read from tables the ...
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