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6. The following table shows the prices of a sample of Treasury strips. Each strip makes a single payment at maturity.

Years to Maturity

Price, (% of face   value)

1

97.652

%

2

94.151

3

90.344

4

86.280

a. What is the 1-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
b. What is the 2-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
c. What is the 3-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
d. What is the 4-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
e. Is the yield curve upward-sloping, downward-sloping, or flat?
f. Is this the usual shape of the yield curve?
6. The following table shows the prices of a sample of Treasury strips. Each strip makes a single payment at maturity.

Years to Maturity

Price, (% of face value)

1

97.652

%

2

94.151

3

90.344

4

86.280

a. What is the 1-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

b. What is the 2-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

c. What is the 3-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

d. What is the 4-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

e. Is the yield curve upward-sloping, downward-sloping, or flat?

f. Is this the usual shape of the yield curve?

7. a. Several years ago, Castles in the Sand Inc. issued bonds at face value of \$1,000 at a yield to maturity of 6.2%. Now, with 6 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 15%. What is the price of the bond now? (Assume semiannual coupon payments.) (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. Suppose that investors believe that Castles can make good on the promised coupon payments but that the company will go bankrupt when the bond matures and the principal comes due. The expectation is that investors will receive only 90% of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

2. Preferred Products has issued preferred stock with an annual dividend of \$6.60 that will be paid in perpetuity.

a. If the discount rate is 11%, at what price should the preferred sell? (Round your answer to 2 decimal places.)

b. At what price should the stock sell 1 year from now? (Round your answer to 2 decimal places.)

c. What are the (i) the dividend yield; (ii) the capital gains yield; (iii) the expected rate of return of the stock? (Enter your answers as a whole percent.)

5. No-Growth Industries pays out all of its earnings as dividends. It will pay its next \$2 per share dividend in a year. The discount rate is 11%.

a. What is the price-earnings ratio of the company? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What would the P/E ratio be if the discount rate were 10%? (Round your answer to 2 decimal places.)

6. Stormy Weather has no attractive investment opportunities. Its return on equity equals the discount rate, which is 20%. Its expected earnings this year are \$2 per share. Complete the following table. (Leave no cells blank. Enter a zero, wherever necessary. Do not round intermediate calculations. Round growth rate to two decimal places.)

Plowback Ratio

Growth Rate

Stock Price

P/E Ratio

a.

0

%

b.

0.40

not attempted
%

not attempted
not attempted

c.

0.60

%

4. In 1880 five aboriginal trackers were each promised the equivalent of 100 Australian dollars for helping to capture the notorious outlaw Ned Kelley. In 1999 the granddaughters of two of the trackers claimed that this reward had not been paid. The Victorian prime minister stated that if this was true, the government would be happy to pay the \$100. However, the granddaughters also claimed that they were entitled to compound interest.

a. How much was each granddaughter entitled to if the interest rate was 3%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. How much was each entitled to if the interest rate was 6%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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