Finance 301 Sample Final Exam

e. If we evaluated at the same effective rate, the earlier payments would give the semiannual bond the higher value.

You recently purchased a stock that is expected to earn 12% in a booming economy, 8% in a normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom, a 75% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of return on this stock?

The table below shows the equity betas for the firms presented in the case (using Jan-92 to Dec-96 equal weight NYSE/AMEX/NASDAQ as market portfolio):

1. You have a portfolio with a beta of 3.1. What will be the new portfolio beta if you keep 85 percent of your money in the old portfolio and 15 percent in a stock with a beta of 4.5?

(b) Coupon and principal of the Regular Treasury bonds are fixed, therefore if the inflation rate increases in the forecasting future, investor will receive the same amount of coupon and principal with less real value and purchasing power.

12. Using the data from the previous question, what trade is necessary to increase the beta of the portfolio to 1.8 from the original beta of 1.5

b. What would Mrs. Beach have to deposit if she were to use common stock and earned an average rate of return of 11%.

a particular asset has a beta of 1.2 and an expected return of 10%. The expected return on the market portfolio is 13% an the risk-free is 5%. Which of the following statement is correct?

(2) How does the riskiness of this two-stock portfolio compare with the riskiness of the individual stocks if they were held in isolation?

A tax-exempt bond was recently issued at an annual 8 percent coupon rate and matures 20 years from today. The par value of the bond is $1,000. If a required market rates are 8 per cent, then the market price of a bond will be $1000. In case of falling in the required market rates fall to 5 per cent, then the market price of the bond will be $1,373.87. In another situation, Charles City Hospital plans on issuing a tax-exempt bond at the bond is $1,000. If required market rates are 6 per cent, the value of the bond will be $1229.40. In same case, if the required market rates fall to 12 per cent then the value of the bond will be $701.22. The above bond sells at a discount at the 3 per cent market rate and the same bond will be sold at a premium at 12% market rate of interest (Gapenski,

b. Generate a graph or table showing how the bond’s present value changes for semi-annually compounded interest rates between 1% and 15%.

d. What would be the investor 's certainty equivalent return for the optimally chosen combination? 2. Consider an investor who has an asset allocation of 50% in equities and the rest in T-Bills. Suppose the expected rate of return on equities is 10%/year and the standard deviation of the return on equities is 15%/year. T-Bills earn 6%/year. a. What is the implied risk aversion coefficient of the investor?

C1. (Beta and required return) The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here.

2. The discount rate for this bond would be 0.70%. I started with an appropriate discount rate to derive my bond purchase price, since I would not purchase a bond without finding out ahead of time what a good price should be.

Using CAPM: Risk Free Rate = 6%; Market Risk Premium = 5%; Beta = 1.2