Zang international Chinese chemical company has a 15% annual coupon interest rate on a $1,000 par value bond with 20 years left to maturity. Bonds of same maturity now sell to yield 11% return.
• How much would you be willing to pay for one of these bonds today? Why?
• If the bond is selling for $ 1,141 what is the yield to maturity?
• Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about for discount bonds? For bonds selling at par value?
(Stocks)Question 2 – 60 points
2a. John’s company’s just paid a dividend of $2.40 per share on its stock and the dividends are expected to grow at a constant rate of 5% per year. If the required rate of return on this stock is 12%, what is value of this stock?
2b. Thomas Brothers stock is selling for $6.25 per share and it is expected to pay a $.50 per share dividend at the end of the year. The dividend of the stock is expected to grow at a constant rate of 7% per year. What is expected rate of return on the stock ?
2c. Johnson Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25). The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

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