1) Please show work 1-a) If I purchase a bond with a coupon rate lower than the
ID: 2737661 • Letter: 1
Question
1) Please show work
1-a) If I purchase a bond with a coupon rate lower than the present market return rate for similar risk investments I will be purchasing the bond at which of the following?
a)premium
b)discount
c)par value
d)a commissioned sale
1-b) The expected return for Project A with the below data is...
Strong demand .30 probability 40% return
Normal demand .50 probability 12% return
Weak demand .20 probability 4% return
a)18.67%
b)18.8%
c)12%
d)12.8%
1-c) I would be willing to pay .... for a bond with quarterly interest with 15 years to maturity, 6% coupon, $1000 par with current market rates of similar risk investments yielding 5%.
a)1000.00
b)1103.80
c1034.00
d)1105.09
1-d) NUM has a beta of .8. Risk free rate is 4%, RPm is 6%. Growth is 5%. 1. What is the required return? 2. If the current dividend was $2, what is the stock value?
a)5.9%, 70
b)8.8%, 52.63
c)8.8%, 55.26
d)8.8%, 22.73
1-e) Investment X has a beta of 1.0. The risk free rate is 2% and current market return is 8%. What is the required return?
a)10%
b)6%
c)2%
d)8%
a)premium
b)discount
c)par value
d)a commissioned sale
Explanation / Answer
Answer 1-a) is B i.e., Discount.
If the bond is purchased with coupon rate lower than the market rate then, the price of the bond will be less than the face value of bond. So, the bond is said to be issued at discount.
Answer 1-b) is B i.e., 18.8%.
Expected Return = (0.30 * 0.40) + (0.50 * 0.12) + (0.20 * 0.04)
Expected Return = 0.12 + 0.06 + 0.08
Expected return = 0.188 = 18.8%
Answer 1-c) is D i.e., 1,105.09.
Price of Bond = 15*(1-(1/1.0125)^60)/0.125 + 1000/1.0125^60
Price of Bond = 1,105.09
Answer 1-d) is
Re = rf + (rm – rf) *
Re = 0.04 + (0.06-0.04)*0.8 = 0.056 = 5.6%
P0 = D1/(Re - g)
P0 = 2*1.05/(0.056-0.05) = 350
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