Bond valuation examples and solutions

Before starting on this assignment, make sure to thoroughly review the required background materials. This assignment will require you to use the various discounted cash flow methods and dividend models to make computations. In addition to knowing the computational steps involved in stock and bond valuation, make sure you also understand the basic concepts.

Submit your answers in a Word document. Make sure to show your work for all quantitative questions, and make sure to fully explain your answers using references to the background readings for any conceptual questions. Questions 1 and 3 will require Excel, so submit an Excel file that shows your computational steps as a separate file in addition to your Word file. Question 4 is purely conceptual; no computations are necessary, but make sure to apply and reference concepts from the required readings in your answers to each of the scenarios.

Case Assignment
Suppose you buy a bond that will pay $1000 in 10 years along with an annual coupon payment of $50. The interest rate is 4%. Answer the following questions:
What is the value of this bond?
Now suppose the bond has no coupon payments (it is a “zero coupon” bond) but still pays $1000 in 10 years. What is the value of this bond?
What would happen to the value of the bond if the inflation rate unexpectedly goes up? What if the bond value increases or decreases?
Now suppose the bond still pays an annual coupon of $50 but the interest rate drops to 2%. What is the new value of this bond?
The XYZ Corporation pays a dividend of $1 for each share, and its required rate of return is 8%. Answer the following questions:
Assuming zero growth in dividends, what is the value of each share?
Now assume a 4% annual growth rate in the dividend paid. What is the value of each share?
Assume the growth rate is still 4%, but the required rate of return drops to 6%. What is the new value of each share?