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.

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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