a. The price of the bond with face value of f100 7 P 1+0.08 +0.0 0.080.08 08)° =f93.29 The equivalent yield-to-maturity(APR)with semi-annual compound ing is 1.08→r=7.8461% The price of the bond with face value of f100 if the yield-to-maturity is 8% per year is 3.5 3.5 3.5 P 1+00392305(+0392305)(+0392305)0(1+00392305) 3.5 3.5 0.03923050.0392305 +0392305)2+100×(1+0.0392305)20 The te, g, Is g=(1-02)×017=136% b. The intrinsic value of the stock is 5×0.20 P ￡7143 0.15-0.136 The expected price a year from now is P1=P0×(+g)=￡81.14 5×02 50 0.15 Therefore, the expected turn on the firms new investments is 0.13=0.8 1r-0.136=50=r=156 50→h=0.29 (1-b) C Gary Xu AcF2 14 Princip les of Finance 2© Gary Xu AcF214 Principles of Finance 2 Question 3 a. The price of the bond with face value of £100 is ( ) ( ) ( ) ( ) ( ) £93.29 1 0.08 100 1 0.08 0.08 7 0.08 7 1 0.08 100 1 0.08 7 1 0.08 7 1 0.08 7 1 0 1 0 0 2 1 0 1 0 = + +       = − + + + + + + + + + = − p  b. The equivalent yield-to-maturity (APR) with semi-annual compounding is 1.08 2 1 2  =      + r  r = 7.8461% The price of the bond with face value of £100 if the yield-to-maturity is 8% per year is ( ) ( ) ( ) ( ) ( ) £94.21 1 0.0392305 100 1 0.0392305 0.0392305 3.5 0.0392305 3.5 1 0.0392305 100 1 0.0392305 3.5 1 0.0392305 3.5 1 0.0392305 3.5 2 0 2 0 0 2 2 0 2 0 = = + + +  + + + + + + + + + = − − p  Question 4 a. The growth rate, g, is g = (1− 0.2)0.17 =13.6% b. The intrinsic value of the stock is £71.43 0.15 0.136 5 0.20 0 = −  p = c. The expected price a year from now is p1 = p0  (1+ g) = £81.14 d. i. 50 0.15 5 0.2 = −  g  g = 13% Therefore, the expected turn on the firm’s new investments is * 0.13 = 0.8  r  16.25% * r = ii. 50 0.136 5 0.2 = −  r  r =15.6% iii. ( ) 50 0.15 0.17 1 5 = −  −  h h  h = 0.29