The riskiness of a future cash flow is measured by _____, and these are all comp

Question

The riskiness of a future cash flow is measured by _____, and these are all components of the SML.

A. the firm's standard deviation, correlation and market risj premium

B. beta, market risk premium and the firm's standard deviation

C. the market risk remium, bet and correlation

D. beta, the market risk premium and the risk-free rate

2. Your firm has just issue a 10-year $1,000 par value, 10% annual coupon bond for a net price of $964.00. What is the yield to maturity?

A. 10.60%

B. 10%

C. 11.10%

D. 9.45%

Explanation / Answer

1. D. Beta, market risk premium, and risk-free rate.

2.

N = 10

Coupon = 0.1

Coupon payment = 0.1*1000 = 100

Current market price = 964

Current market price = c1/(1+y)1 + c2/(1+y)2 + ……+ cn/(1+y)n + 1000/(1+y)n

964 = 100/(1+y)1 + 100/(1+y)2 + 100/(1+y)3 + ……..+ 100/(1+y)10 + 1000/(1+y)10

Solve for Y using excel

Answer is option A.

YTM 0.10601097 Year Cashflow (x) Discount rate = 1/(1+y)^n Present Value 1 100 0.90415017 90.41501668 2 100 0.81748752 81.74875241 3 100 0.73913148 73.91314813 4 100 0.66828585 66.82858521 5 100 0.60423076 60.42307646 6 100 0.54631535 54.63153466 7 100 0.49395111 49.39511118 8 100 0.44660598 44.66059801 9 100 0.40379887 40.37988714 10 1100 0.36509482 401.6042986 Present value 964.0000085

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