Finance exam 2

Nesmith Corporation's outstanding bonds have a $1,000 par value, a 10% semiannual coupon, 7 years to maturity, and an 7% YTM. What is the bond's price? Round your answer to the nearest cent.

$1,163.81 N = 2 x 7 = 14; I/YR = 7%/2 = 3.5%; PMT = (0.1/2) x 1,000 = 50; FV = 1000.With a financial calculator, solve for PV = $1,163.81

outstanding bond has 1000 par value 8% semi annual coupon, 14 years to maturity and 11% YTM Whats bond price?

$788.18 N= 14*2=28, I/Y= 11/2= 5.5, PMT=40, FV=1000, PV=? PV=788.18

You are considering a 15-year, $1,000 par value bond. Its coupon rate is 9%, and interest is paid semiannually. If you require an "effective" annual interest rate (not a nominal rate) of 11.08%, how much should you be willing to pay for the bond? Do not round intermediate steps. Round your answer to the nearest cent.

$868.47 EAR = (1 + INOM/2)^2 - 1 0.1108 = (1 + INOM/2)^2 - 1INOM = 0.1079%. Semiannual interest rate = 0.1079/2 = 0.0539 = 5.4%. Solving for price:N = 2 x 15 = 30, I/YR = 5.4%, PMT = 0.09/2 x 1,000 = 45, FV = 1,000 PV = -$868.47. VB = $868.47

bond valuation 10 years remaining to maturity, m interest paid annually have $1000 par value, coupon interest is 8%, and yield to maturity is 9% what's the bonds current market price?

$988.46 N=10, PMT=70, PV=-985, FV=1000, I/Y=? YTM / I/Y= 7.22% N=7, I/Y=7.215, PMT=70, FV-1000, PV=? Vb= 988.46

fisher effect - real - nominal

- 0 inflation - real rate + premium of inflation

for callable bond what yield is more likely to be earned by investor if - bond selling at discount - bond selling at premium

- YTM - YTC

Treasury bonds

- referred to as government bonds, are issued by the federal government. - reasonable to assume that the U.S. government will make good on its promised payments, so Treasuries have no default risk.

A Treasury bond that matures in 10 years has a yield of 5.75%. A 10-year corporate bond has a yield of 7%. Assume that the liquidity premium on the corporate bond is 0.3%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.

.95% rC10 = 7% = 5.75% + 0.3% + DRP0. 95% = DRP.

Given the following information, determine the beta coefficient for Stock L that is consistent with equilibrium: = 8.75%; rRF = 4.95%; rM = 10.5%. Round your answer to two decimal places.

0.68 r^L = = 8.75%. rL =rRF + (rM - rRF)b 8.75% =4.95% + (10.5% - 4.95%)b b =0.68

1. Potter Industries has a bond issue outstanding with an annual coupon of 6% and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 7.4%, what is the value of the bond? Round your answer to the nearest cent. Do not round intermediate calculations. 2. Potter Industries has a bond issue outstanding with a 6% coupon rate with semiannual payments of $30, and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 7.4%, what is the value of the bond? Round your answer to the nearest cent. Do not round intermediate calculations

1. $903.46. N = 10; I/YR = 7.4; PMT = 0.06 × $1,000 = 60; and FV = 1,000. Solve for PV = Bond Value = $903.46. 2. $902.29. N = 10 × 2 = 20; I/YR = 7.4/2 = 3.7; PMT = 0.06/2 × $1,000 = 30; and FV = 1,000. Solve for PV = Bond Value = $902.29.

1. A bond has a $1000 par value , 10 years to maturity and a 7% annual cupon and sells for $985 What's the yield to maturity 2.Assume yield to maturity remains constant for the next 3 years. What will the price be 3 years from today

1. 7.22% n=10 pv=-985 PMT= 70 FV=1000 Solve YTM=I/Y=7.22% 2. $988.46 10-3=7 n=7 PMT=70 I/Y= 7.215 FV= 1000 Solve VB=PV= $988.46

Would you pay $843 for each bond if you thought that a "fair" market interest rate for such bonds was 13%-that is, if rd = 13%? 1. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return. 2. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return. 3. You would buy the bond as long as the yield to maturity at this price equals your required rate of return. 4. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return. 5. You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on the bond.

1. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

Which of the following bonds would have the largest duration? 10-year, zero coupon bonds 10-year, 7% annual coupon bonds. 10-year, 3% annual coupon bonds 5-year, 3% annual coupon bonds 3-year, 7% annual coupon bonds.

10-year, zero coupon bonds.

$5 million portfolio beta of 1.15 required rate of return of 11.425%, current risk free rate is 4%, assume receive another $500000 if you invest money with stock with beta of 8.5, What will be the required return on $5.5 million portfolio?

11.3 .11475=.04+(rM-rRF)1.15 (rM-rRF)=6.5% (500,000/5,500,000)(.85)+(5,000,000/5,500,000)(1.15) = 1.12273 rp=rRF+(rM-rRF)BP 4%+(6.5%)(1.2273) = 11.29773

You have been managing a $5 million portfolio that has a beta of 0.80 and a required rate of return of 12%. The current risk-free rate is 6.25%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 0.70, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places.

11.93% Determine the market risk premium from the CAPM: 0.12 =0.0625 + (rM - rRF)0.8 (rM - rRF) =0.0719. Step 2:Calculate the beta of the new portfolio:($500,000/$5,500,000)(0.7) + ($5,000,000/$5,500,000)(0.8) = 0.7909. Step 3:Calculate the required return on the new portfolio:6.25% + (7.19%)(0.7909) = 11.93%

Assume risk free rate is 5.5%, required on market is 12% what is required rate of return on a stock with a beta of 2

18.5% rRF=5.5 rM=12% b=2 r=? ri=rRF+(rM-rRF)Bi =.055+(.12-.055).2 = 18.5%

$20000 invested in stock with beta of .6 and another 75000 invested in stock with beta of 2.5 if these are only 2 in portfolio what is portfolios beta?

2.10 20000+75000=95000 bp= (20000/95000)(.6)+(75000/95000)(2.5) bp= 2.1

The real risk-free rate is 3.25%, and inflation is expected to be 3.75% for the next 2 years. A 2-year Treasury security yields 9.75%. What is the maturity risk premium for the 2-year security? Round your answer to two decimal places.

2.75% rT2 = r* + IP2 + MRP2 = 9.75% rT2 = 3.25% + 3.75% + MRP2 = 9.75% MRP2 = 2.75%.

Beale Manufacturing Company has a beta of 1.7, and Foley Industries has a beta of 0.95. The required return on an index fund that holds the entire stock market is 12%. The risk-free rate of interest is 7%. By how much does Beale's required return exceed Foley's required return? Round your answer to two decimal places.

3.75%. r =rRF + (RPM)b 12.00% =7% + (RPM)1.0 5.00% =RPM. rB =rRF + (RPM)b =7% + (5.00%)1.7 =7% + 8.50% =15.50% rF =rRF + (RPM)b =7% + (5.00%)0.95 =7% + 4.75% =11.75%. 15.50% - 11.75% = 3.75%.

Maturity Risk Premium The real risk-free rate is 2.25%, and inflation is expected to be 3.25% for the next 2 years. A 2-year Treasury security yields 9.5%. What is the maturity risk premium for the 2-year security? Round your answer to two decimal places.

4% rT2 = r* + IP2 + MRP2 = 9.5% rT2 = 2.25% + 3.25% + MRP2 = 9.5% MRP2 = 4%.

You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.1%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums: Inflation premium = 2.75% Liquidity premium = 0.4% Maturity risk premium = 1.55% Default risk premium = 2.6% On the basis of these data, what is the real risk-free rate of return? Round your answer to two decimal places.

5.10% = r* + 2.75% r* = 2.35%.

The real risk-free rate is 2.15%. Inflation is expected to be 3.15% this year, 3.65% next year, and 2.7% thereafter. The maturity risk premium is estimated to be 0.05(t - 1)%, where t = number of years to maturity. What is the yield on a 7-year Treasury note? Do not round your intermediate calculations. Round your answer to two decimal places.

5.35% r7 = r* + IP7 + MRP7 + DRP + LP.r* = 0.0215 IP7 = [0.0315 + 0.0365 + (5)(0.027)]/7 = 0.029 MRP7 = 0.0005(t - 1) = 0.0005(6) = 0.003. rT7 = r* + IP7 + MRP7 rT7 = 0.0215 + 0.029 + 0.003 = 0.0535 = 5.35%.

Stock R has a beta of 1.9, Stock S has a beta of 0.8, the required return on an average stock is 9%, and the risk-free rate of return is 3%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places.

6.60% bR = 1.9, bS = 0.8, rM = 9%, rRF = 3% ri = rRF + (rM - rRF)bi = 3% + (9% - 3%)bi rR = 3% + 6%(1.90) =14.40% rS = 3% + 6%(0.80) = 7.80 14.4-7.8= 6.60%

Suppose you are the money manager of a $4.91 million investment fund. The fund consists of four stocks with the following investments and betas: Stock... Investment... Beta A... 460,000... 1.50 B... 680,000... - 0.50 C... 1,220,000... 1.25 D... 2,550,000... 0.75 If the market's required rate of return is 8% and the risk-free rate is 7%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

7.77% 460000/4910000 (1.5)+ 680000/4910000(-.5)+ 1220000/4910000(1.25) +2550000/4910000(.75) =bp bp =(0.09)(1.5) + (0.14)(-0.50) +(0.25)(1.25) + (0.52)(0.75)=0.1405 - 0.0692 + 0.3106 + 0.3895 = 0.7714. rp = rRF + (rM - rRF)(bp) = 7% + (8% - 7%)(0.7714) = 7.77%

Stock... Dollar... investmentBeta A. $300,000..... 1.35 B. 200,000..... 1.7 C. 300,0000..... .65 D. 200,000..... -0.25 Total investment$1,000,000 The market's required return is 10% and the risk-free rate is 5%. What is the portfolio's required return? Round your answer to 3 decimal places. Do not round intermediate calculations.

9.450% Stock A Investment = $300,000/$1,000,000 = 30% Stock B Investment = $200,000/$1,000,000 = 20% Stock C Investment = $300,000/$1,000,000 = 30% Stock D Investment = $200,000/$1,000,000 = 20% bp = 0.3(1.35) + 0.2(1.7) + 0.3(0.65) + 0.2(-0.25) = 0.8900 Market risk premium = Return on market - Risk-free rate Market risk premium = 10% - 5% = 5% Portfolio's required return = Risk-free rate + (Market risk premium)(Portfolio's beta) rp = 5% + (10% - 5%)(0.8900) = 9.450%

What is a bond?

A long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond.

which is the best measure of risk for single asset held in isolation

CV coefficient of variation

_______ bonds are exchangeable at the option of the holder for the issuing firm's common stock

Convertible

________ bonds pay interest only if the firm has earnings, while an indexed (purchasing power) bond bases interest payments on an inflation index to protect the holder from inflation.

Income

An asset's risk can be considered in two ways:

On a stand-alone basis and in a portfolio context.

______ risk is the risk of a decline in a bond's value due to an increase in interest rates. This risk is _______ on bonds that have long maturities than on bonds that will mature in the near future.

Price higher

________ bonds contain a provision that allows holders to sell them back to the company prior to maturity at a prearranged price.

Putable

________ risk is the risk that a decline in interest rates will lead to a decline in income from a bond portfolio.

Reinvestment

Has bonds outstanding with $1000 face value and 15 years left until maturity. They have an 11% annual coupon payment and current price is $1185. The bonds may be called in 5 years at 109% of face value. Call price= $1090 YTM&YTC which yield might investors expect to earn on these bonds

YTM= N=15 PV=-1185 PMT= 11*1000= 110 Fv=1000 YTM= I/Y = 8.74 YTC= Fv=1090 n=15 Pv= -1185 PMT= 110 YTC= I/Y= 7.91 Investors will expect to earn YTC

A 7% semiannual coupon bond matures in 5 years. The bond has a face value of $1,000 and a current yield of 7.4842%. a. What is the bond's price? Round your answer to the nearest cent. b. What is the bond's YTM? Round your answers to two decimal places

a. $935.30 N = 5 x 2 = 10, PMT = 70/2 = 35, and FV = 1,000. Current yield = Annual interest/Current price 0.074842 = $70/PV PV = $70/0.074842 = $935.30 b. 8.62% N = 10, PV = -935.30, PMT = 35, and FV = 1,000. Solve for I/YR = YTM = 4.31%. However, this is a periodic rate so the nominal YTM = 4.31%(2) = 8.62%

A stock has a required return of 13%; the risk-free rate is 5.5%; and the market risk premium is 5%. a. What is the stock's beta? Round your answer to two decimal places. b. If the market risk premium increased to 7%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. 1. If the stock's beta is less than 1.0, then the change in required rate of return will be greater than the change in the market risk premium. 2. If the stock's beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium. 3. If the stock's beta is equal to 1.0, then the change in required rate of return will be greater than the change in the market risk premium. 4. If the stock's beta is equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium. 5. If the stock's beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium. c. New stock's required rate of return will be _____%. Round your answer to two decimal places.

a. 1.5 r = 13%; rRF = 5.5%; RPM = 5%. r =rRF + (rM - rRF)b 13% =5.5% + 5%b 7.5% =5%b b =1.50 b. 16.00% rRF = 5.5%; RPM = 7%; b = 1.50. r =rRF + (rM - rRF)b=5.5% + (7%)1.50= 16.00%

stock has a required return of 9% risk free rate is 4.5% and market risk premium is 3% a. what is stocks beta? b. if market risk premium increased to 5% what happens to stocks required rate of return? Assume risk free rate and beta remained unchanged

a. 1.5 ri= rRF+(rM-rRF)Bi .09=.045+.03Bi (.09-.045)/.03 = 1.5 b. 12% ri= rRF+(rM-rRF)Bi r= .045+(.05*1.5) = 12%

rRF = 4%; rM = 9%; RPM = 5%, and beta = 1.2 a. What is WCE's required rate of return? Round your answer to 2 decimal places. Do not round intermediate calculations. b. If inflation increases by 2% but there is no change in investors' risk aversion, what is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations. c. Assume now that there is no change in inflation, but risk aversion increases by 2%. What is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations. d. If inflation increases by 2% and risk aversion increases by 2%, what is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations.

a. 10% Required return = Risk-free return + (Market risk premium)(Stock's beta) Required return = 4% + (5%)(1.2) = 10.00% b. 12% Required return = Risk-free return + (Market risk premium)(Stock's beta) If inflation increases by 2% but risk aversion doesn't change then the risk-free rate increases from 4% to 6%. The market risk premium does not change. So, WCE's required rate of return is now calculated as: rWCE = 6% + (5%)(1.2) = 12.00% c. 12.4% Required return = Risk-free return + (Market risk premium)(Stock's beta) If inflation doesn't change but risk aversion increases by 2%, then the risk premium changes from 5% to 7%. WCE's required rate of return is now calculated as: rWCE = 4% + (7%)(1.2) = 12.40% The firm's required return increases from 10% to 12.4%. The increase is reflected by the change in the market risk premium multiplied by the firm's beta: 2% × 1.2 = 2.4%. d. 14.4% Required return = Risk-free return + (Market risk premium)(Stock's beta) If inflation increases by 2%, then the risk-free rate increases from 4% to 6%. In addition, if risk aversion increases by 2%, then the risk premium changes from 5% to 7%. WCE's required rate of return is now calculated as: rWCE = 6% + (7%)(1.2) = 14.40% The firm's required return increases from 10% to 14.4%. The increase reflects both the change in inflation and risk aversion = 2% + 2.4% = 4.4%.

outside bonds with 9 years left to maturity, 9% annual coupon rate issued 1 year ago, par value 1000, bond price fell to 910.30 capital gains yield was 8.97% a. Whats yTM b. for coming tear whats expected current and capital gains yield?

a. 10.595% N=9, PV=-910.30, PMT=90, FV=1000, I/Y=? b. .71% N=8, I/Y=1-.595, PMT=90, FV=1000 PV=? PV=916.74 CGY= (916.74-910.30)/910.30 = .71%

Stocks A and B have the following probability distributions of expected future returns: Probability... A... B 0.1... -6%... -40%... 0.3... 3... 0 0.3... 16... 19 0.2... 22... 27 0.1... 37... 41 a. Calculate the expected rate of return, rB, for Stock B (rA = 13.20%.) Do not round intermediate calculations. Round your answer to two decimal places. % b. Calculate the standard deviation of expected returns, σA, for Stock A (σB = 21.37%.) Do not round intermediate calculations. Round your answer to two decimal places. % c. Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places. d. Is it possible that most investors might regard Stock B as being less risky than Stock A? 1. If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense. 2. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense. 3. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense. 4. If Stock B is more highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be less risky in a portfolio sense. 5. If Stock B is more highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.

a. 11.20% = 0.1(-40%) + 0.3(0%) + 0.3(19%) + 0.2(27%) + 0.1(41%)= 11.20% b. 11.94% σA2 = (-6% - 13.20%)2(0.1) + (3% - 13.20%)2(0.3) + (16% - 13.20%)2(0.3) + (22% - 13.20%)2(0.2) + (37% - 13.20%)2(0.1) = 0.014256. σA = 11.94% c. 1.91 CVA = A/ra = 11.94%/13.20% = 0.90, CVB = 21.37%/11.20% = 1.91 d. 2

One year ago Carson Industries issued a 10-year, 15% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,075, and it now sells for $1,180. a. What is the bond's nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. b. What is the bond's nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places. c. Would an investor be more likely to earn the YTM or the YTC? d. What is the current yield? Round your answer to two decimal places. e. What is the expected capital gains (or loss) yield for the coming year? Use amounts calculated in above requirements for calcuation, if reqired. Round your answer to two decimal places. Enter a loss percentage, if any, with a minus sign.

a. 11.71% N = 18,PV = -1,180.00,PMT = 75,FV = 1,000,and solve for YTM = I/YR = 5.8556%. The nominal YTM = 5.8556%(2) = 11.7112% ≈ 11.71% b. 11.65% N = 12,PV = -1,180.00,PMT = 75,FV = 1,075,and solve for YTC = I/YR = 5.823%. However, this is a periodic rate. The nominal YTC = 5.823%(2) = 11.646% ≈ 11.65% c. Since the YTM is above the YTC, the bond is likely to be called d. 12.71% The current yield = $150/$1,180.00 = 12.71% e. -1.00% YTM = Current yield + Capital gains (loss) yield 11.71% = 12.71% + Capital loss yield -1.00% = Capital loss yield

7 years ago, issued 20 years bonds with 11% annual coupon rate at 1000 par value, bond has 7.5% call premium with 5% of call protection corporate realized rate of return for investment who purchased when issued when realized and held until they were called? should investors be happy?

a. 11.75% N=7, PV=-1000, FV=(1000*7.5)+1000=1075, PMT=.11(1000)=110, I/Y=? =11.75? b. investors not happy YTC<YTM

Assume that the risk-free rate is 5.5% and the market risk premium is 7%. a. What is the required return for the overall stock market? Round your answer to two decimal places. % b. What is the required rate of return on a stock with a beta of 2.1? Round your answer to two decimal places.

a. 12.5% rRF = 5.5%; RPM = 7%; rM = ? rM = 5.5% + (7%)1 = 12.5% b. 20.2% r when b = 2.1 = ? r = 5.5% + 7%(2.1) = 20.2%

Seven years ago the Templeton Company issued 25-year bonds with a 12% annual coupon rate at their $1,000 par value. The bonds had a 7% call premium, with 5 years of call protection. Today Templeton called the bonds. a. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places. b. Why the investor should or should not be happy that Templeton called them. 1. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they can now do so at higher interest rates. 2. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates. 3. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns. 4. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk. 5. Since the bonds have been called, interest rates must have fallen sufficiently such that the YTC is less than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.

a. 12.68% N = 7;PV = -1000;PMT = 120;FV = 1,070;I/YR = ?Solve for I/YR = 12.68% b. 5

6 years left to maturity, interest paid annually, bonds have 1000 par value and corporate rate of 10% a. what's YTM at current market price of $865 and $1166 b. would you pay $865 for bonds if you thought for market interest was 12%

a. 13.42, 6.56 N=6, PMT=.1*1000=100, PV=-865, FV=1000, I/Y=? I/Y=13.42% N=6, PMT=.1*1000=100, PV=-1166, FV=1000, I/Y=? I/Y= 6.56% b. yes because 13.43>12 so you would be willing to buy bond at any price below 917.77 YTM>ROR= good buy

Harrimon Industries bonds have 5 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%. a. What is the yield to maturity at a current market price of$843? Round your answer to two decimal places. b. $1,085? Round your answer to two decimal places.

a. 13.52% VB = $843:Input N = 5,PV = -843,PMT = 90,FV = 1000,YTM = I/YR = ?I/YR = 13.52% b. 6.93% VB = $1,085:Change PV = -1,085,YTM = I/YR = ?I/YR = 6.93%.

Demand for the Company's Products...Probability of This Demand Occurring...Rate of Return If This Demand Occurs Weak... 0.1... -48% Below average... 0.1... -10 Average... 0.3... 15 Above average... 0.4... 39 Strong... 0.1... 46 a. Calculate the stock's expected return. Round your answer to two decimal places. % b. Calculate the stock's standard deviation. Do not round intermediate calculations. Round your answer to two decimal places. % c. Calculate the stock's coefficient of variation. Round your answer to two decimal places.

a. 18.9% expected return= (0.1)(-48%) + (0.1)(-10%) + (0.3)(15%) + (0.4)(39%) + (0.1)(46%) = 18.9% b. 27.76% σ^2 = (-48% - 18.9%)2(0.1) + (-10% - 18.9%)2(0.1) + (15% - 18.9%)2(0.3) + (39% - 18.9%)2(0.4) + (46% - 18.9%)2(0.1) σ^2 = 0.077069; σ = 27.76% c. 1.47 cv= 27.76/18.9= 1.47

Stock. Expected Return. Standard Deviation. Beta A. 8.58%... 16%... 0.7 B. 10.34... 16... 1.1 C. 12.10... 16... 1.5 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) a. What is the market risk premium (rM - rRF)? Round your answer to two decimal places. % b. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. % Would you expect the standard deviation of Fund P to be less than 16% equal to 16% greater than 16%

a. 4.4% 8.58% =rRF + (rM - rRF)bx 8.58% =5.5% + (rM - rRF)0.7 (rM - rRF) =4.4% b. 1.10 bQ = 1/3(0.7) + 1/3(1.1) + 1/3(1.5) bQ = 0.2333 + 0.3667 + 0.5000 bQ = 1.10 c. 10.34% rQ = 5.5% + 4.4%(1.10) rQ = 10.34% d. less than 16%,

An analyst evaluating securities has obtained the following information. The real rate of interest is 2.6% and is expected to remain constant for the next 5 years. Inflation is expected to be 2.5% next year, 3.5% the following year, 4.5% the third year, and 5.5% every year thereafter. The maturity risk premium is estimated to be 0.1 × (t-1)%, where t = number of years to maturity. The liquidity premium on relevant 5-year securities is 0.5% and the default risk premium on relevant 5-year securities is 1%. a. What is the yield on a 1-year T-bill? Round your intermediate calculations and final answer to two decimal places. b. What is the yield on a 5-year T-bond? Round your intermediate calculations and final answer to two decimal places. c. What is the yield on a 5-year corporate bond? Round your intermediate calculations and final answer to two decimal places.

a. 5.1% rT1 = 2.6% + 2.5% = 5.1% b. 7.3% IP5 = (2.5% + 3.5% + 4.5% + 5.5% + 5.5%)/5 = 4.3% and MRP5 = 0.1 (5 - 1)% = 0.4%. rT5 = 2.6% + 4.3% + 0.4% = 7.3% c. 8.8 IP5 = (2.5% + 3.5% + 4.5% + 5.5% + 5.5%)/5 = 4.3% and MRP5 = 0.1 (5 - 1)% = 0.4%. rC5 = 2.6% + 4.3% + 0.4% + 1% + 0.5% = 8.8% OR rC5 = 7.3% + 1% + 0.5% = 8.8%

You are given the following probability distribution for CHC Enterprises: State of Economy...Probability...Rate of return Strong. 0.15.... 21% Normal. 0.45.... 9% Weak. 0.4... -5% a. What is the stock's expected return? Round your answer to 2 decimal places. Do not round intermediate calculations. b. What is the stock's standard deviation? Round your answer to two decimal places. Do not round intermediate calculations. c. What is the stock's coefficient of variation? Round your answer to two decimal places. Do not round intermediate calculations.

a. 5.2% Expected return = 0.15(21%) + 0.45(9%) + 0.4(-5%) Expected return = 0.0315 + 0.0405 + (-0.02) = 5.20% b. 9.25% Standard deviation = [0.15(21% - 5.2%)2 + 0.45(9% - 5.2%)2 + 0.4(-5% - 5.2%)2]1/2 Standard deviation = [0.003745 + 0.00065 + 0.004162]^1/2 Standard deviation = [0.008556]^1/2 = 9.25% c. 1.78 Coefficient of variation = Standard deviation/Expected return Coefficient of variation = 9.25%/5.20% = 1.78

maturity of 8 years, 1000 face value, 11% semi annual coupon callable in 4 years at 1154 and currently sell at price of 1283.09 a. what's nominal yield b. what's nominal yield to call? c. what return should investors expect to earn on these bonds?

a. 6.42% N=8 x 2=16, PV=-1283.09, PMT=(.11/2)*1000=55, FV=1000, I/Y=? I/y= 3.21*2= 6.42% b. Pv=-1283.09, FV=1154, N=4*2=8, PMT= (.11/2)1000=55, I/Y=? I/y= 6.32 c. YTC<YTM, investors expect to earn YTC

A firm's bonds have a maturity of 10 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 5 years at $1,056, and currently sell at a price of $1,109.05. a. What is their nominal yield to maturity? Round your answer to two decimal places. b. What is their nominal yield to call? Round your answer to two decimal places. c. What return should investors expect to earn on these bonds? 1. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC. 2. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM. 3. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC. 4. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM. 5. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.

a. 6.50% N = 10 x 2 = 20; PV = -1,109.05; PMT = 0.08/2 x 1,000 = 40; FV= 1,000; I/YR= YTM = ?YTM = 3.25% x 2 = 6.50%. b. 6.39% N = 5 x 2 = 10; PV = -1,109.05; PMT = 0.08/2 x 1,000 = 40; FV = 1,056; I/YR = YTC = ? YTC = 3.195% x 2 = 6.39% c. 2

Ace Products has a bond issue outstanding with 15 years remaining to maturity, a coupon rate of 8% with semiannual payments of $40, and a par value of $1,000. The price of each bond in the issue is $1,196.00. The bond issue is callable in 5 years at a call price of $1,080. a. What is the bond's current yield? Round your answer to two decimal places. Do not round intermediate calculations. b. What is the bond's nominal annual yield to maturity (YTM)? Round your answer to two decimal places. Do not round intermediate calculations. c. What is the bond's nominal annual yield to call (YTC)? Round your answer to two decimal places. Do not round intermediate calculations.

a. 6.69% Current yield = Annual interest payments/Current bond price Current yield = $80/$1,196 = 6.69%. b. 6% N = 15 × 2 = 30; PV =-1,196; PMT = 0.08/2 × $1,000 = 40; and FV = 1,000. Solve for I/YR = 3.00%; however, this is a semiannual rate so you need to multiply this result by 2 to obtain the nominal annual YTM of 2 × 3.00% = 6.00%. c. 4.96% N = 5 × 2 = 10; PV =-1,196; PMT = 0.08/2 × $1,000 = 40; and FV = 1,080. Solve for I/YR = 2.48%; however, this is a semiannual rate so you need to multiply this result by 2 to obtain the nominal annual YTС of 2 × 2.48% = 4.96%.

A bond has a $1,000 par value, 8 years to maturity, and a 7% annual coupon and sells for $980. a. What is its yield to maturity (YTM)? Round your answer to two decimal places. b. Assume that the yield to maturity remains constant for the next 4 years. What will the price be 4 years from today? Round your answer to the nearest cent.

a. 7.34% N = 8;PV = -980;PMT = 70;FV = 1,000;YTM = ? Solve for I/YR = YTM = 7.3394% ≈ 7.34% b. $988.59 N = 4;I/YR = 7.3394%;PMT = 70;FV = 1,000;PV = ? Solve for VB = PV = $988.59

risk free rate is 3.5%, market premium is 4% a. What's the required return for overall stock market b. what is required rate of return on stock with net of .8

a. 7.5% r^RF= 3.5% RPm= 4% rm= RPm+rRF rm= 4%+3.5%=7.5 b. 6.7% rL=rRF+RPl rRF+(rM-rRP)Bi 3.5+(4%)(.8) =6.7%

Pelzer Printing Inc. has bonds outstanding with 19 years left to maturity. The bonds have an 7% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $890.20. The capital gains yield last year was -10.98%. a. What is the yield to maturity? Round your answer to two decimal places. b. For the coming year, what is the expected current yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places. c. For the coming year, what is the expected capital gains yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places.

a. 8.156% N = 19,PV = -890.20,PMT = 70.00,FV = 1,000I/YR = YTM = 8.156% b. 7.863%. CY = $70.00/$890.20 = 7.863%. c. 0.293% CGY = YTM - CY = 8.156% - 7.863% = 0.293%. OR N = 18,I/YR = 8.156%,PMT = 70.00,FV = 1,000 PV = -$892.81.VB = $892.81. (capital gains yield is the percentage price appreciation over the next year) CGY = (P1 - P0)/P0 = ($892.81 - $890.20)/$890.20 = 0.293%.

a. bond has $800 par value, 12 years to maturity and 8% annual coupon and sells $980 a. calculate YTM b. assume YTM remains constant for the next 3 years what will the price be 3 years from today?

a. 8.27% N=12, PV=-980, PMT=80, FV=1000, I/Y=? I/Y= 8.27% b. $983.38 N= 12-3=9, I/Y=8.27, PMT=80, FV=1000, PV=? PV= 983.38

A bond is more likely to be called if its price is ______ par—because this means that the going market interest rate is less than its coupon rate.

above

This relationship between risk and return indicates that investors are risk _________; investors dislike risk and require ________ rates of return as an inducement to buy riskier securities. A risk ________ represents the additional compensation investors require for bearing risk; it is the difference between the expected rate of return on a given risky asset and that on a less risky asset.

averse higher premium

A(n) ________ is a long-term contract under which a borrower agrees to make payments of interest and principal on specific dates. There are four main types reflecting who the issuers are: _________, corporate, municipal, and foreign. Each type differs with respect to ______ and expected return. All have some common characteristics even though they may have different contractual features.

bond Treasury risk

A _______ provision gives the issuer the right to redeem the bonds under specified terms prior to their normal maturity date, although not all bonds have this provision. Some bonds have _______ provisions which require the issuer to systematically retire a portion of the bond issue each year. Because sinking fund provisions facilitate their orderly retirement, bonds with these provisions are regarded as being ______ so they will have ________ coupon rates than similar bonds without these provisions.

call sinking fund safer lower

Companies raise capital in two main ways:

debt and equity.

The prices of long-term bonds _______ whenever interest rates rise

decline

If the government spends more than it takes in as taxes, it runs a ______, which must be covered by additional borrowing or by printing money.

deficit

A ________ bond is one that sells below its par value

discount

what happens as you add randomly selected stocks to portfolio which currently consists of 8 average stocks

diversifiable risk of portfolio likely to decline but expected market risk should not change

how can investor get rid of systematic risk

diversifiable with portfolio concept

To account for the effects related to both a bond's maturity and coupon, many analysts focus on a measure called ________, which is the weighted average of the time it takes to receive each of the bond's cash flows.

duration

An average stock's beta is _______ because an average-risk stock is one that tends to move up and down in step with the general market. A stock with a beta _______ 1 is considered to have high risk, while a stock with beta _______ 1 is considered to have low risk.

equal to greater than less than

The CAPM states that any stock's required rate of return is ______ the risk-free rate of return plus a risk premium that reflects only the risk remaining ______ diversification. Most individuals hold stocks in portfolios. The risk of a stock held in a portfolio is typically ______ the stock's risk when it is held alone.

equal to after lower than

bond selling at premium then market value of bond ___ par value

exceeds

Bonds can be _______ -rate bonds with a constant coupon rate over the life of the bond, or they can be _________-rate bonds with a coupon rate that varies over time depending on the level of interest rates. ________ bonds pay no annual interest but are sold at a discount ______ par, thus compensating investors in the form of capital appreciation.

fixed floating Zero coupon below

Mortgage bonds are backed by________

fixed assets

If the entire population was living at the subsistence level, time preferences for current consumption would be _____ , savings would be ______, interest rates would be _____, and capital formation would be _______.

high low high difficult

________ risk and _______ inflation lead to higher interest rates.

higher higher

If the government borrows money, this ________ the demand for funds and ________ interest rates. If the government prints money, the result will be _________ inflation, which will increase interest rates.

increases increases increased

While long-term bonds are heavily exposed to _______ risk, short-term bills are heavily exposed to _________ risk.

interest reinvestment

The ____ is the price that lenders receive and borrowers pay for debt

interest rate

For fixed-rate bonds it's important to realize that the value of the bond has a(n) _______ relationship to the level of interest rates. If interest rates rise, then the value of the bond _____; however, if interest rates fall, then the value of the bond _______

inverse falls rises

Which type of risk is more relevant to an investor depends on the investor's _________, which is the period of time an investor plans to hold a particular investment.

investment horizon

Foreign bonds

issued by a foreign government or a foreign corporation. All foreign corporate bonds are exposed to default risk, as are some foreign government bonds

Corporate bonds

issued by business firms. Unlike Treasuries, corporates are exposed to default risk — if the issuing company gets into trouble, it may be unable to make the promised interest and principal payments and bondholders may suffer losses. Different corporate bonds have different levels of default risk depending on the issuing company's characteristics and the terms of the specific bond.

diversification ________ the portfolio's risk.

lowers

If a portfolio consists of two stocks that are perfectly ________ correlated then the portfolio is riskless because the stocks' returns move countercyclically to each other. If the returns of the stocks are perfectly ________ correlated then the stocks' returns would move up and down together and the portfolio would be exactly as risky as the individual stocks

negatively positively

The interest rate on debt, r, is also equal to the ______ risk-free rate plus a default risk premium plus a liquidity premium plus a maturity risk premium.

nominal

Stand-alone risk is the risk an investor would face if he or she held only ________

one asset

The ______ value of a bond is its stated face value or maturity value, and its coupon interest rate is the stated annual interest rate on the bond.

par

The capital asset pricing model (CAPM) explains how risk should be considered when stocks and other assets are held in ______

portfolios

A ________ bond is one that sells above its par value.

premium

Although investing in short-term T-bills preserves one's ______ , the interest income provided by short-term T-bills is _______ stable than the interest income on long-term bonds.

principal less

The real risk-free rate is 2.25%. Inflation is expected to be 2.25% this year and 4.5% during the next 2 years. Assume that the maturity risk premium is zero. a. What is the yield on 2-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. b. What is the yield on 3-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places.

r* = 2.25%; I1 = 2.25%; I2 = 4.5%; I3 = 4.5%; MRP = 0; rT2 = ?; rT3 = ? r = r* + IP + DRP + LP + MRP. a. 5.63% rT2 = r* + IP2.IP2 = (2.25% + 4.5%)/2 = 3.375%.rT2 = 2.25% + 3.375% = 5.63%. b. 6% rT3 = r* + IP3.IP3 = (2.25% + 4.5% + 4.5%)/3 = 3.75%.rT3 = 2.25% + 3.75% = 6.00%.

difference in rates between treasury bond and corporate bond if 10 year t-bonds have yield of 6.75% 10 year corporate bond yield 8.55% maturity risk premium on all 10 year bonds is 2.3% and corporate has .6% liquidity premium VS 0 liquidity premium for t-bonds What's default risk premium on corporate bond?

r= r*+IP+MRP+DRP+LP (8.55%+ 6.75%)=DRP+.6 = 1.2%

During a ________, the demand for money and the inflation rate tend to fall and the Fed tends to ________ the money supply to stimulate the economy

recession increase

Municipal bonds

refers to bonds issued by state and local governments. exposed to some default risk; but they have one major advantage over all other bonds: The interest earned on most munis is exempt from federal taxes and from state taxes if the holder is a resident of the issuing state. Consequently, the market interest rate on a muni is considerably lower than on a corporate of equivalent risk.

required return on stock

risk-free return + (market risk premium)(stocks beta)

The real risk-free rate of interest may be thought of as the interest rate on _________ U.S. Treasury securities in an inflation-free world.

short-term

The coefficient of variation is a better measure of stand-alone risk than standard deviation because it is a standardized measure of risk per unit; it is calculated as the ________ divided by the expected return. The coefficient of variation shows the risk per unit of return, so it provides a more meaningful risk measure when the expected returns on two alternatives are not ________

standard deviation identical

If a stock's expected return plots on or above the SML, then the stock's return is ______ of Item 1 to compensate the investor for risk. If a stock's expected return plots below the SML, the stock's return is _________ to compensate the investor for risk.

sufficient insufficient

Expected capital gains yield can be found as

the difference between YTM and the current yield.

The ______ an asset's probability distribution, the lower its risk.

tighter