Bonds & Stocks A) Bond

Bonds & Stocks a) Bond Time Coupon Price YTM b) c) the yield curve represented is a normal yield curve in which the yield to maturity increases as the maturity date gets further away. This is due to the risks associated with time. The increased risk of time is compensated for with a higher yield. Bond Coupon Price YTM Price The 6-year, 0.9% coupon bond moved the most. The 2-year bond moved the least. Bond Coupon Price YTM Price The 6-year, 0.9% coupon bond moved the most.

The 2-year bond moved the least. A f) if an investor is only holding bonds for a short time, they can minimize their risk by choosing bonds with a shorter maturity. These will move the least in the event of an interest rate change. For bonds of equal maturity, the higher coupon will be the lower-risk investment. A g) Companies who wish to raise funds by issuing debt will recognize that government bonds still bear some degree of interest rate risk.

A key difference between government debt and corporate debt is the risk of default. Because corporate debt carries the risk of default, the company must offer a risk premium to entice investors, that is, they must offer a great yield to maturity. If they offer this via a higher coupon, they will reduce the risk of price fluctuations on their debt. Part II: Stocks The dividend growth model assumes three components to stock price: next year's dividends, the required rate of return, and the assumed constant rate of dividend growth.

The model assumes constant growth of dividends. The required rate of return is the discount rate. Next year's dividends are the starting point upon which the dividend growth is calculated and brought back to present value. The problem with using this model is that it assumes that the market does not ascribe any value to the potential for capital gains.

Many investors seek capital gains (indeed, if stock prices were explicitly tied to dividends, this is the only way they would make money as the stock price would be the present value of future cash flows). The model also assumes a current dividend, which many companies do not offer. They merely re-invest their profits. If a future dividend is assumed, and the value of the stock is theoretically derived from those future cash flows, there must be an assumption.