# USC ECON 457 – Assume that Ford has a 30 year, 6.5% coupon

Questions #7,8, and CFA problem at bottom of page.Problem Set 4Due: Monday, Oct. 24. 12:00 pm 1) Assume that Ford has a 30 year, 6.5% coupon bond. Given Fordâs recent troubles, your brokerindicates that the yield-to-maturity of this bond should be 7.95%. Assume that couponpayments are annual. What should be the price of this bond? 2) Assume that 3M Corporation has a 15 year, 8% coupon bond and that its reported yield-tomaturity is 7.3%. Assume that coupon payments are semiannual (remember that if paymentsoccur on a semiannual basis then the reported yield to maturity will actually be twice thesemiannual yield). What is the price of this bond? 3) Disney Corp has a 7 year, 6.95% coupon bond that is currently selling for 978.65. Assume thatcoupon payments are annual. What is the yield-to-maturity of this bond? (USE excel)7.35% use IRR on excel.4) Hayworth Industries does not currently pay dividends; however, investors expect that in fouryears, the firm will pay its first dividend of \$1.50 per share. From that point onwards, thedividend is expected be \$2 annually forever. Assume that investors required rate of return is13%. What should the price of Hayworth Industries be today? 5) Last year, IBM paid a dividend of \$1.50 per share. Investors think that IBMâs dividend will growat 10% for the next four years. After that, the dividend will be constant at \$4. What should bethe price per share of IBM if the discount rate is 8%? Chapter 56. You are considering the choice between investing \$50,000 in a conventional 1-year bank CD offeringan interest rate of 5% and a 1-year âInflation Plusâ CD offering 1.5% per year plus the rate of inflation.a. Which is the safer investment?b. Which offers the higher expected return?c. If you expect the rate of inflation to be 3% over the next year, which is the better investment?d. If we observe a risk-free nominal interest rate of 5% per year and a risk free real rate of 1.5% oninflation-indexed bonds, can we infer that the market expected rate of inflation is 3.5% per year?7. Suppose your expectations regarding the stock price are as follows:State of the MarketProbabilityEnding PriceBoom0.35\$140Normal Growth0.30110Recession0.3580 HPR(including dividends)44.5%14.0-16.5 Compute the mean and standard deviation of the HPR on the stocks.8. Derive the probability distribution of the 1-year HPR on a 30-year US treasury bond with an 8%coupon if it is currently selling at par and the probability distribution of its yield to maturity a year fromnow is as follows:State of the Economy Probability YTMBoom0.2011.0%Normal Growth0.508.0Recession0.307.0For simplicity, assume the entire 8% coupon is paid at the end of the year rather than every 6 months.CFA problems:1. Given \$100,000 to invest, what is the expected risk premium in dollars of investing in equitiesversus risk-free T-bill ( US Treasury bills) based on the following table:ActionInvest in equitiesInvest in risk-free T-bill Probability0.60.41.0 Expected outcome\$50,000-\$30,000\$5,000