Finance 545 Hw Week 3

5-1 Bond Valuation with Annual Payments:

P = F*r*[1 -(1+i)^-n]/i + C*(1+i)^-n

= 1000*.08 * (1 - 1.09^-12)/.09 + 1000*1.09^-12

= 80*7.1607+1000*.3555 = $928.39

5-2 YTM for Annual Payments:

100+1000-850/12/1000+850/2 =

112.5/925 = .1216 or 12.16%

5-6 Maturity Risk Premium:

6.3-3-3 = 0.3%

5-7 Bond Valuation with Semi-Annual Payments:

50*11.44+1000*.5138 = 1086

5-13 Yield to Maturity and Current Yield:

Current price = 80/.0821 = 974

YTM = 80+1000-974/5/1000+974/2 = 85.2/987 = .0863 or 8.63%

6-6 Beta and Expected Return:

If the beta doubles, it is not a guarantee that the expected return will double.

6-1 Portfolio Beta:

.8*35000/75000+1.4*40000/75000 = .3733+.7467 = 1.12

6-2 Required Rate of Return Stock:

6+.7*13-6= 10.9%

6-7 Required Rate of Return:

Suppose rRF = 9%, rM = 14%, and bi = 1.3.

a. 9+1.3*14-9=15.5%

b. Ri will be at 10% = 10+1.3*14-10 = 15.2%

It has decreased by 0.3%

Ri will be at 8% = 8+1.3*14-8 = 15.8%

It has increased by 0.3%

It may be assumed that there will not be any impact on rM

c. Ri will be at 16% = 9+1.3*16-9 = 18.1%

It has increased by 2.6%

Ri will be at 13% = 9+1.3*13-9 = 14.2%

It has decreased by 1.3%