Fi515 Week 3

FI515_Homework3

Chapter 5

5-1Jackson Corporation’s bonds have 12 yrs 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?

Given Data:

N 12 yrs

I/Y 9 years

FV 1,000

PMT $80 (1000 x 0.08)

PV $928.39

5-2Wilson Wonders’ 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 10%. The bonds sell at a price of $850. What is their yield to maturity?

Given Data:

N 12 yrs

PMT 100

FV 1000

PV -850

I/Y 12.48

5-6The 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?

Given Data:

rRF 3%

inlation 3% next 2 years

2 year treasury – 6.3%

3%+3%=6% 6.3 – 6 = .3 MRP

MRP .3

5-7Refro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1000, and a yield to maturity of 8.5%. What is the price of the bonds?

Given Data:

N 16 (8*2, periods)

I/Y 4.25 (8.5/2)

PMT 50 (1000 * .10 / 2)

FV 1000

PV 1085.80

5-13You 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?

N 5

PMT 80

FV 1000

I/Y 8.65

PV -974.42

Current yield = annual interest/current price

.0821=80/PV

80/.0821=974.42

Chapter 6

6-1An 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?

Given Data:

35,000 investment beta .8

40,000 investment beta 1.4

75,000

Calculation:

35,000/75,000 = .4667 *.8 + (40,000/75,000)*1.4

.3734+.7466=1.12...