Fi515 Week 3 Assignment

Problems (pp. 210-211)
5-1 Bond Valuation with Annual Payments
Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%. What is the current market price of these bonds?

5-2 YTM for Annual Payments
Wilson Wonders’s bonds have 12 years remaining to maturity. Interest is paid annu- ally, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity?

5-6 Maturity Risk Premium
The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.3%. What is the maturity risk premium for the 2-year security?

5-7 Bond Valuation with Semi-Annual Payments
Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the bonds?

5-13 Yield to Maturity and Current Yield
You just purchased a bond that matures in 5 years. The bond has a face value of $1,000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What is the bond’s yield to maturity?

Questions (p. 257)
6-6 Beta and expected return
If a company’s beta were to double, would its expected return double?

Problems (pp. 258-259)
6-1 Portfolio Beta
An individual has $35,000 invested in a stock with a beta of 0.8 and another $40,000 invested in a stock with a beta of 1.4. If these are the only two investments in her portfolio, what is her portfolio’s beta?

6-2 Required Rate of Return Stock
Assume that the risk-free rate is 6% and that the expected return on the market is 13%. What is the required rate of return on a stock that has a beta of 0.7?

6-7 Required Rate of Return
Suppose rRF = 9%, rM = 14%, and bi = 1.3.
a. What is ri, the required rate of return on Stock i?
b. Now suppose rRF (1) increases to 10% or (2) decreases to 8%. The slope of the
SML remains constant. How would this affect rM and ri?
c. Now assume rRF remains at 9% but rM (1) increases to 16% or (2) falls to 13%.
The slope of the SML does not remain constant. How would these changes affect ri?