Capital gain on investment, Financial Management

a. Why do prices of low coupon bonds tend to fluctuate more than the prices of high coupon bonds? And why do prices of longer te$ to maturity bonds tend to fluctuate more than the prices of shorter te$ to maturity bonds?

b. What is a callable bond? Why is the importance of a sinking fund? Should the issuing company exercise the option to call the bond when the interest rate rises? Why or why not?

c. What is the value of a $1,000 zero coupon government bond that matures after eight years, if comparable yields are 7%?

d. A homeowner has been offered three alternative mortgage loans to finance the purchase of a $300,000 house. The interest rate on the first alternative is 8 percent for twenty-five years, and the loan requires a 20 percent down payment. The second mortgage loan is also for twenty-five years with an interest rate of 7 percent but requires a down payment of a third of the cost of the house. The third loan also requires a third down but is for 20 years at 6 percent. What are the annual mortgage payments required by each loan?

e. If you purchase a $5 preferred stock for $40 a share, what is the current yield? If you anticipate that yields will decline to 10 percent, what will be the anticipated capital gain on this investment?

Posted Date: 3/18/2013 5:50:15 AM | Location : United States

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