Everything else held constant, if the expected return on bonds falls from 10 to 5 percent and the expected relative return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock to bonds and the demand for GE stock falls; rises. rises; falls rises; rises. falls; falls
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- Which bonds are acceptable for investment? Justify your response with suitable computations. 2. What will be the total cost of investment in bonds? 3. Do the stock and bond investments fall within Stephanie’s investment guidelines? Show appropriate computations in support of your response.Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 14%. According to the capital asset pricing model: a. What is the expected return on the market portfolio?b. What would be the expected return on a zero-beta stock?c. Suppose you consider buying a share of stock at a price of $30. The stock is expected to pay a dividend of $4 next year and to sell then for $31. The stock risk has been evaluated at β = -0.5. Is the stock overpriced or underpriced?Questions: Compute the expected intrinsic price of each stock in year 5. Assume that All stocks are fairly priced such that the intrinsic and market values are equal. Dividends are paid at the beginning of the year How many units of each stock will Stephanie buy? Support your response with relevant computations. What will be the total investment cost for shares? Show appropriate calculations. Which bonds are acceptable for investment? Justify your response with suitable computations. What will be the total cost of investment in bonds? Do the stock and bond investments fall within Stephanie’s investment guidelines? Show appropriate computations in support of your response. Will Stephanie have enough funds for her investment in stocks and bonds, when needed? What will be the surplus / shortfall, if any? Given that Stephanie’s bank offers an interest rate of 6% per year, what additional amount should she have deposited as a fixed…
- Over the next three years, the expected path of 1-year interst rates is 4,1, and 1 percent. Today you buy $1 of one-year bond and when it matures you plan to use the money you receive to reinvest in one-year bond again. Then your expected rate of return for this $1 investment is _____% (round to the nearest integer). If the expectations theory of the term structure is true, then your expected rate of return for buying a two-year bond today is ____%, which implies that the current interest rate on 2-year bond must be ____%Suppose that, holding yield constant, investors are indifferent as to whether they hold bonds issued by the federal govemment or bonds issued by state and local governments (that is, they consider the bonds the same with respect to default risk, information costs, and liquidity) Suppose that state governments have issued perpetuities (or consoles) with $78 coupons and that the federal govemment has also issued perpetuities with $78 coupons. If the state and federal perpetuites both have after-tax yields of 8%, what are their pre-tax yields? (Assume that the relevant federal income tax rate is 31.13%) * The pre-tax yield on the state perpetuity will be______________% * The pre-tax yield on the federal perpetuity will be_______________%Suppose you expect a stock to pay a dividend of $10 every year forever and the discount rate is fixed at 5%. What would expect the price of that stock to be? What happens to the price of the stock if the discount rate falls to 2%? (Note: this exercise might help explain why the stock market is so high these days, despite the COVID-19 pandemic and lackluster economy.)
- Suppose a bond with no expiration date has a face value of $10,000 and annually pays a fixed amount of interest of $800. Compute and enter in the spaces provided in the accompanying table either the interest rate that the bond would yield to a bond buyer at each of the bond prices listed or the bond price at each of the interest yields shown. What generalization can be drawn from the completed table?9 A program, if implemented, will operate for 10 years for certain. Your best guess is that after year 10 and following each year thereafter there will be a 0.02 probability the program will end. Real net benefits are $25 the first year and are expected to grow 1% per year as long as the program is in operation. Benefits accrue at the end of the year. The real discount rate is 3.5%. What is the NPV of the horizon value of net benefits following year 10, as seen from time 0, the beginning of the first yearAccording to the portfolio theroies of money deman , which of the following statement is true? an increase in the epected rate of inlfation increases the deman for money an increase in the real return of stock increases the demand of the money a decrease in wealth increase the deman for money a decrease in the real return on bonds increases the demand for money
- The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, andtwo years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of£) as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantitydemanded/supplied at this interest rate? What happens to the demand/supply of the bond asthe interest rate increases? Explain why. c) What is the equilibrium interest rate?The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, andtwo years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of£) as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantitydemanded/supplied at this interest rate? What happens to the demand/supply of the bond asthe interest rate increases? Explain why. c) What is the equilibrium interest rate? d) Suppose that the bond trades at premium. Is there excess demand or supply? Explain.e) There is a business cycle expansion, so both supply and demand shifts. After the shift, thenew demand curve is given by: D = 4000 + X − 2P, whereas the new supply curve is S =2P + 200. For which values of X will the interest increase/decrease? Which values of X arein line with empirical data?An economist has estimated that, near the point of equilibrium, the demand curve and supply curve for 1 year bonds can be estimated using the following equations:Demand: Price = (-0.5)*Quantity + 930Supply: Price = Quantity + 500Assume the face of the bond is $1,000.1. What is the expected equilibrium price and quantity of bonds in this market to 4 decimal places? Price$ Quantity 2. Given your answer to part (a), which is