Q1：

Here's why these statements are true:

a. The coupon rate is the interest rate that the bond issuer agrees to pay annually on the face
value of the bond, and the yield to maturity is the total return that an investor would receive
by holding the bond until it matures. If a bond's coupon rate is higher than its yield to maturity,
it means that the bond is paying out more in interest than the prevailing market rates. In such
a scenario, the bond is more attractive to investors since it provides a higher periodic income
than other bonds in the market, which will drive up the price of the bond above its face value
(or par value).

b. If a bond’s coupon rate is lower than its yield to maturity, this means that the bond's
payments to the investor are less than what the market is offering for new issues with similar
risk. The bond will therefore sell at a discount to entice buyers. However, as the bond
approaches its maturity date, the price will generally tend to move closer to its face value,
assuming there's no change in the credit quality of the issuer and market interest rates. This
increase in price is due to the fact that at maturity, the bond issuer will pay the bond's face
value to the bondholder, regardless of the bond’s price history. This process is known as "pull
to par", where the bond price will tend to converge to the par value as the maturity date
approaches.

Q2
a. If interest rates rise, do bond prices rise or fall?
Example: Consider a bond with a face value of $1000 and a coupon rate of 5%, paid
annually. If the market interest rate rises from 5% to 6%, the present value of future cash
flows (coupons and face value) must be discounted at the higher market interest rate,
which results in a lower present value. Therefore, the price of the bond will fall.

b. If the bond yield to maturity is greater than the coupon, is the price of the bond greater
or less than 100?
Example: If a bond has a face value of $100 and a coupon rate of 4%, but the yield to
maturity is 5%, the bond will sell for less than its face value to compensate the buyer for
the lower coupon payments compared to the market rate. Hence, the price of the bond
will be less than 100.

c. If the price of a bond exceeds 100, is the yield to maturity greater or less than the coupon?
Example: A bond with a face value of $100 paying a coupon rate of 3% sells for $105. The
yield to maturity must be less than 3% because the investor is willing to pay a premium
over the face value, indicating they accept a lower yield than the coupon rate.

d. Do high-coupon bonds sell at higher or lower prices than low-coupon bonds?

Example: Suppose we have two bonds, each with a face value of $100 and a yield to
 maturity of 5%. Bond A has a coupon rate of 6%, and Bond B has a coupon rate of 4%.
Bond A will sell for more than its face value (premium), and Bond B will sell for less than
its face value (discount), assuming all other factors are equal.

e. If interest rates change, do the prices of high-coupon bonds change proportionately

more than that of low-coupon bonds?
Example: Imagine there are two bonds, one with a coupon rate of 2% and another with a
coupon rate of 8%. If interest rates increase by 1%, the bond with the lower coupon rate
will experience a greater percentage change in price because its coupons are less
sufficient to offset the rise in market interest rates. In contrast, the high-coupon bond's
larger coupons provide more income, helping to mitigate the effect of rising rates on the
bond's price.

Q3

𝐶 𝐶 𝐶 + 𝑃𝑎𝑟
𝑃𝑉 = + +⋯+
1 + 𝑟 (1 + 𝑟)2 (1 + 𝑟)𝑡
C=1000*2.75%=27.5
r=5.2%/2=2.6%
t=10*2=20
Then, PV≈$1023.16

For question b, we need to generate a graph that shows how the bond's present value
changes for semiannually compounded interest rates between 1% and 15%.

To create this graph, we will calculate the present value of the bond for a range of semiannual
interest rates from 1% to 15% and then plot these values.
Q4

Company P/E Ratio P/B Ratio

Entergy Corporation (ETR) 14.04 1.51
American Electric Power (AEP) 18.01 1.65
Eversource Energy (ES) 16.72 1.27
Southern Company (SO) 25.22 2.41

The P/E and P/B ratios for the electric companies you've listed exhibit some variation, but
they are not excessively scattered. They are within a range that is somewhat typical for
companies within the same industry. Here's a brief analysis:

• P/E Ratios: Entergy's P/E ratio is the lowest at 14.04, with Eversource Energy slightly
higher at 16.72, American Electric Power at 18.01, and Southern Company at 25.22.
Southern Company's P/E ratio stands out as significantly higher than the others.

• P/B Ratios: Entergy's P/B ratio is in the mid-range at 1.51. Eversource has the lowest
P/B ratio at 1.27, AEP is slightly higher at 1.65, and Southern Company is again the
outlier at 2.41, which is substantially higher than the others.

The P/E ratio spread from 14.04 to 25.22 indicates that there is some diversity in how the
market values the earnings of these companies, possibly due to growth expectations, risk
profiles, or other factors. The P/B ratios, ranging from 1.27 to 2.41, also show a spread but
less dramatically so, which may reflect differences in assets valuation or capital structure.

If we didn't know Entergy's stock price, these comparables could give you a ballpark estimate,
provided you take into account the range of the ratios. The estimates might be more accurate
if you adjust them based on the specifics of Entergy's financial health, growth prospects, and
market conditions relative to these comparables. However, because Southern Company's
ratios are significantly higher, they might skew the average if used without adjustment. A
median value might provide a better estimate in such a case.

Investors often use a blend of P/E and P/B ratios to gauge valuation, but it's important to
consider that ratios alone do not give a complete picture. They should be used in conjunction
with other financial analysis methods and qualitative assessments to arrive at a thorough
valuation.
Q5
While capital gains are indeed a significant component of an investor's returns, the dividend
discount model (DDM) emphasizes that dividends are also a fundamental part of the stock's
intrinsic value. The model posits that the value of a stock is the sum of all its expected future
dividend payments, discounted back to their present value. This approach reflects the
investment's income-generating potential, which can be particularly important for investors
who prioritize income or when growth prospects are uncertain.

Even for investors primarily seeking capital gains, dividends still matter. They can be
reinvested to purchase more shares, compounding growth, or provide a return independent
of market fluctuations. Moreover, regular dividends may signal a company's financial health
and discipline in capital allocation, which can support long-term appreciation in the stock's
price, thus contributing to capital gains.

The DDM is most applicable to companies with stable and predictable dividend payments.
For high-growth companies that reinvest earnings rather than distribute them as dividends,
or for companies that do not pay dividends at all, other valuation methods might be more
appropriate to capture the capital gains aspect that investors might be seeking.

Q6
To find the current stock price using the Dividend Discount Model (DDM) for a one-time
future dividend payment :
𝐷1 + 𝑃1
𝑃0 =
(1 + 𝑟)1

Given the numbers:

• D1 = $5
• P1 = $110
• r = 8%

Then, P0≈$106.48