Question

Top hedge fund manager Diana Sauros believes that a stock with the same market risk as the S&P 500 will sell

at year-end at a price of $53. The stock will pay a dividend at year-end of $2.30. Assume that risk-free Treasury securities currently offer an interest rate of 2.3%.

Average rates of return on Treasury bills, government bonds, and common stocks, 1900–2013 (figures in percent per year) are as follows.

Portfolio		Average Annual Rate of Return		Average Premium (Extra return versus Treasury bills)
Treasury bills		3.9
Treasury bonds		5.2		1.3
Common stocks		11.5		7.6

What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.)

Discount rate

%

What price should she be willing to pay for the stock today? (Do not round intermediate calculations.Round your answer to 2 decimal places.)

Stock price

$

 

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Question

Consider three bonds with 6.8% coupon rates, all making annual coupon payments and all selling at a face value of

$1,000. The short-term bond has a maturity of 4 years, the intermediate-term bond has maturity 8 years, and the long-term bond has maturity 30 years.

a.	What will be the price of each bond if their yields increase to 7.8%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	4 Years	8 Years	30 Years
Bond price	$	$	$

b.	What will be the price of each bond if their yields decrease to 5.8%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	4 Years	8 Years	30 Years
Bond price	$	$	$

c.	Are long-term bonds more or less affected than short-term bonds by a rise in interest rates?
	More affectedLess affected

d.	Would you expect long-term bonds to be more or less affected by a fall in interest rates?
	More affectedLess affected

 

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