1. Bond pricing-
Large Industries bonds sell for $1065.15. The bond life is 9 years, and the yield to maturity is 7 percent. What must be the coupon rate on the bonds?

2. Bond prices and yields
a. Several years ago, Castles in the Sand, Inc., issued bonds at faced value at a yield to maturity of 7 percent. Now, with 8 years left until the maturity of the bonds, the company has run into hard times and the yield to the maturity on the bonds has increased to 15 percent. What has hapened to the price of the bond?

b. Suppose that investors believe that Castles can make good on 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 80 percent of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive?

3. Real Returns-Suppose that you buy a 1 year maturity bond for $1000 that will pay you back $1000 plus a coupon payment of $60 at the end of the year. What real rate of return will you earn if the inflation rate is

a. 2 percent
b. 4 percent
c. 6 percent
d. 8 percent


4. Nonconstant Growth. A company will pay a $2 per share dividend in 1 year. The dividend in 2 years will be $4 per share, and it is expected that dividends will grow at 5 percent per year thereafter. The expected rate of return on the stock is 12 percent.

a.What is the current price of the stock?
b.What is the expected price of the stock in a year?
c.Show that the expected return, 12 percent, equals dividend yield plus capital appreciation.