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Problem 1
Four and a half years ago, I purchased at par, a 10 year 6% coupon bond assuming that it pays semi-annual interest. Today the market rate of interest is 4% and I’m considering to sell the bond.
a. Since I’m selling the bond today….
i. How much should I sell the bond for?
ii. The current yield on the bond?
iii. What will be my annual holding period return on the bond?
b. Supposedly my friend offers me a price of $1125 for the bond today. Would I be willing to sell the bond to her?
Problem 2
TESLA is a relatively young tech company. It is going through a period of high growth and has thus decided not to pay any dividends until the end of year 6. At the end of year six it will pay a dividend of $two. This dividend will grow at a rate of 25% for the next 4 years. After that TESLA pledges to maintain a constant 5% growth rate in dividends for forever. How much will I pay for a share of TESLA today? Required rate of return is 18%.
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