1. (10%) Hercules Corp issued a $1,000 bond 10 years ago with an initial term of 25 yearsand a coupon rate of 7%. Today comparable bonds yield 11%.

a. What is the price of the bond today?

b. What is the coupon rate of the bond?

c. What is the bonds yield-to-maturity?

d. What is the bonds current yield?

(15%) Jane purchased a 25-year Raytheon callable bond 5 years ago with a coupon rate of9%. The bond has a face value of $1,000 and has a call protection period of 10 years fromthe date of issue. The bond will also pay a call premium of one years interest if the bond iscalled. Today similar bonds without the call provision have a coupon rate of 6%. Assumethe bond is sure to be called.

a. What is the price of the bond today?

b. What would be the price of the bond without the call feature?

(15%) Your firm has narrowed down its investment selection to two bonds. One is aseasoned issue of Kraft Heinz (KHC), which originally was a 25-year bond with a 5%coupon rate that was issued 20 years ago. The other is a newly issued 25-year bond ofGeneral Mills (GIS) that carries a coupon rate of 6%. Both bonds have a face value of$1,000. Assume KHC and GIS carry the same debt rating.

a. What is the price of each bond today?

b. Your firm strongly believes that interest rates are set to rise significantly in thenear-term. Your boss tells you to assume interest rates will rise to 10%. Whichbond would you recommend for investment given your firms outlook for interestrates and why?

4. (10%) Your friend has found an Illinois Power Company bond trading in the market todayat what she believes is a fantastic value. The bond is currently priced at $825 with a parvalue of $1,000. The 10-year bond was issued 5 years ago with a coupon rate of 10%.Bonds of companies with similar risk profiles to Illinois Power Company at the time ofissue are currently yielding 15%. What do you advise your friend?

5. (10%) Jane just purchased a Nvidia 25-year convertible bond with a coupon rate of 9%.The bond has a face value of $1,000 and has a conversion ratio of 4. Jane paid $1,050 forthe bond. Similar Nvidia bonds without the conversion feature have a coupon rate of 12%and currently sell for $950. Nvidia is currently not paying any dividends and the stockprice is currently $275. Answer the following problems:a.) After one year, Nvidias stock price has risen to $375. Jane converts her bond and sellsimmediately. What is her return on her investment?b.) What would have been the one-year return had Jane invested in the straight bond(without the conversion) assuming interest rates are flat?c.) What would Janes return have been had she just invested in the stock?d.) What would the returns of these 3 investments been if the stock price had fallen by$100?

6. (20%) IBM just reported earnings and their stock sold off in the market. IBM reported epsfor full year 2021 of $12.20. They also just paid a dividend of $6.28. Analysts expectearnings growth of 8% over the next few years. Your boss asks you to put together a quickvaluation of the company to assess whether it could be undervalued. IBM has a beta of 1.23and the risk-free rate and market rate of return are 2.5% and 9.5%, respectively. Assumethe following:a. IBM is expected to grow at 8% for the next 4 years, then settle into a secular growthrate of 4%. IBM intends to maintain a constant payout ratio. IBM is currentlytrading at $129. What is your intrinsic value for IBM?b. What is the percentage return to fair value?c. What secular growth rate does IBMs current stock price imply?

7. (10%) Union Pacific Corporation (UNP) has preferred stock returning a current yield of10%. The preferred was issued 5 years ago with a dividend yield of 8%. If an investorbought it when issued, what is their current total return (ignore taxes)?

8. (10%) Charlie has a three-stock portfolio and is interested in estimating its return over thenext year. He has $25,000 invested in Food Corp, which has a beta of 1.05; $55,000invested in Cable Corp, with a beta of 0.75; and $15,000 invested in Computer Corp, whichhas a beta of 2.25. The stock market is currently returning 9.5% and Treasuries areyielding a 3.5% risk-free rate. What return should Charlie expect on his portfolio nextyear?