Assume we have the following preferred issue. Par value = $100; coupon 8%; yield
ID: 2383179 • Letter: A
Question
Assume we have the following preferred issue. Par value = $100; coupon 8%; yield = 9%.
1.What is its price assuming annual dividends with the next dividend coming in exactly one year.
What is its price assuming annual dividends with the next dividend coming in exactly 3 months.
In the beginning of January 2000 the SPX index value was 1394; exactly 15 years later the value was 2059. Determine the geometric return on the SPX over this period.
(True or false) Does the rate of return you computed in the previous question represent the return to an investor who held the SPX over this period?
Explanation / Answer
1.What is its price assuming annual dividends with the next dividend coming in exactly one year.
cost of preferred issue = annual dividend / market price of share
= 9 / 100 = .09.
2. What is its price assuming annual dividends with the next dividend coming in exactly 3 months.
cost of preferred issue = annual dividend / market price of share
= 9 / 100 * 4 = .36.
3. Determine the geometric return on the SPX over this period.
4. False - Does not the rate of return you computed in the previous question represent the return to an investor who held the SPX over this period?