5) Claculate portolfio expect return and beta. 10% 15% $2,000 18% $2,000 2.4 Req
ID: 1175888 • Letter: 5
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5) Claculate portolfio expect return and beta. 10% 15% $2,000 18% $2,000 2.4 Required Return Beta A)15.2% 1.98 B)14%2 C) 13.56%; 2.1 D) 17.2% 1.98 e 6) The expected return on the market potfolio is 15% and its market risk premium is 12%. Stock A has a beta of 1.2. What is the required rate of return on Stock A according to CAPM? B) 21% C) 17.4% D) 14.4% A) 15% 7) A bond issued by XYZ has a coupon rate of 9% and par value is $1,000. The bond will matures in 7 years. What is the value of this bond if the investor's required rate of return is 15%? A) $1282.35 B) $1,006.72 C) $1,301.98 D) $750.37 8) XYZ Corporation just issued $1,000 par value 20-year bonds. The coupon rate is (APR) 6.4%, paid semiannually. Investors require a rate of 7% on the bonds, what is the value of the bonds to investors? A) $935.93 B) $1,412.16 C) $1,619.30 D) $683.36 9) XYZ Corporation Bond has a coupon rate of (APR) 6%, paid semiannually. The face value is $1,000 and the bonds mature on January 1, 2021. What is yield to maturity (for 6 months) for XYZ Corporation Bond on January 1,2012 if the market price on that date is $9507 A) 2.25% B) 338% C) 4.43% D) 5.50% 10) What is the current yield of a bond that matures in 5 years, has a par value of $1,000, a coupon rate 8% paid quarterly, and is currently selling for $982? A) 8% B) 2.04% C) 8.15% D) 2%Explanation / Answer
5)
Total investment = 2000 + 2000 + 1000 = 5000
Weight of A = 2000 / 5000 = 0.4
Weight of B = 2000 / 5000 = 0.4
Weight of C = 1000 / 5000 = 0.2
Expected return = 0.4 * 0.15 + 0.4 * 0.18 + 0.2 * 0.1
Expected return = 0.06 + 0.072 + 0.02
Expected return = 0.152 or 15.2%
Portfolio beta = 0.4 * 2 + 0.4 * 2.4 + 0.2 * 1.1
Portfolio beta = 0.8 + 0.96 +0.22
Portfolio beta = 1.98
15.2%;1.98
6)
Market risk premium = return on market - risk free rate
0.12 = 0.15 - risk free rate
risk free rate = 0.03 or 3%
Required rate of return using CAPM = risk free rate + beta ( market risk premium)
Required rate of return = 0.03 + 1.2 ( 0.12 )
Required rate of return = 0.174 or 17.4%
7)
Coupon payment = 0.09 * 1000 = 90
Value of bond = coupon payment * [ 1 - 1 / ( 1 + R)n] / R + face value / ( 1 + R)n
Value of bond = 90 * [ 1 - 1 / ( 1 + 0.15)7] / 0.15 + 1000 / ( 1 + 0.15)7
Value of bond = 90 * 4.16042 + 375.937
Value of bond = $750.37
8)
Coupon payment = 0.064 * 1000 = 64 / 2 = 32
Number of periods = 20 * 2 = 40
Rate = 0.07 / 2 = 0.035 or 3.5%
Value of bond = 32 * [ 1 - 1 / ( 1 + 0.035)40 ] / 0.035 + 1000 / ( 1 + 0.035)40
Value of bond = 32 * 21.355 + 252.572
Value of bond = $935.93
9)
Coupon payment = 0.06 * 1000 = 60 / 2 = 30
Number of periods = 9 * 2 = 18
6 month yield to maturity using a a financial calculator = 3.38%
Keys to use in a financial calculator: FV 1000, PV -950, N 18, PMT 30, CPT I/Y
10)
Current yield = annual coupon payment / price
Current yield = ( 0.08 * 1000) / 982
Current yield = 80 / 982
Current yield = 0.0815 or 8.15%
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