From the Treasury Note?

From the Treasury Note?

<p>. Judy Johnson is choosing between investing in two Treasury securities that mature in five years and have par values of $1,000. One is a Treasury note paying an annual coupon of 5.06 percent. The other is a TIPS which pays 3 percent interest annually. a. If inflation remains constant at 2 percent annually over the next five years, what will be Judy’s annual interest income from the TIPS bond? </p><p>$1000*.03 = $30.</p><p>From the Treasury note?</p><p>1000*.056 = $50.6 b. How much interest will Judy receive over the five years from the Treasury note? </p><p>50.6*5 = $253</p><p>From the TIPS?</p><p>30*5 = $150 c. When each bond matures, what par value will Judy receive from the Treasury note?</p><p>$1000</p><p>The TIPS?</p><p>$1000 d. After five years, what is Judy’s total income (interest par) from each bond? </p><p>Treasury = 1253</p><p>Tips = 1150</p><p>Should she use this total as a way of deciding which bond to purchase?</p><p>The total amount to be added after finding out the present value of cash flow of each year by market interest rate, but if the market interest rate is the same for each kind of bonds, the present value of cash flow for each year will be equal to par value of $1000 26. Mercier Corporation’s stock is selling for $95. It has just paid a dividend of $5 a share. The expected growth rate in dividends is 8 percent. a. What is the required rate of return on this stock? </p><p>5*1.08/95+.08 = .1368 or 13.68% b. Using your answer to (a), suppose Mercier announces developments that should lead to dividend increases of 10 percent annually. What will be the new value of Mercier’s stock? </p><p>5*1.1/.1368-.1 = $149.46 c. Again using your answer to (a), suppose developments occur that leave investors expecting that dividends will not change from their current levels in the foreseeable future. Now what will be the value of Mercier stock? </p><p>5/.1368 = $36.55 d. From your answers to (b) and (c), how important are investors’expectations of future dividend growth to the current stock</p><p>Definitely two stock are paying dividend but one of them is going to pay more than other how the market price can be same, the demand for growth rate dividend will be more than other one. This is also proved theoretically by looking at the price difference in with growth and without growth. </p>

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