Fi515 Week 3

847 Words Sep 27th, 2011 4 Pages
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?

P = F*r*[1 -(1+i)^-n]/i + C*(1+i)^-n, where F = par value C = maturity value r = coupon rate per coupon payment period i = effective interest rate per coupon payment period n = number of coupon payments remaining

F = 1000. Since we are not given the maturity value, we can assume that it is the same as the par value. So, C = 1000.

r = .08 i = .09 n = 12 The bond price is 1000*.08 * (1 -
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6-6 Beta and expected return
If a company’s beta were to double, would its expected return double? Beta Coefficient is the measure of a stock 's relative volatility. The beta is the covariance of a stock in relation to the rest of the stock market. The Standard & Poor 's 500 Stock Index has a beta coefficient of 1 (one). Therefore, the stock 's price can be expected rise and fall twice as fast as the market in general. As to the required return, that would be up to the people who choose to invest in that particular stock.

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? Beta is weighted average: [(35000)(0.8) + (40000)(1.4)] / 75000 = 1.12

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? R^I = RF +(rM-rRF) * B = 0.06 + (0.13-0.06) * 0.7 = 0.109 = 10.9%

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

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