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Mba , Financial Course

In: Business and Management

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Homework for Unit 3

Homework: 5-2, 6-6, and 6-10 5-2 Pg. 210 Wilson Wonders’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity? INT = (Coupon rate)(Par value) = (.10)(1000) = 100 VB = INT [1/rd – 1/rd(1 + rd)N] + M/(1 + rd)N = 100[1/.10 – 1/.10(1 + .10)12] + 1000/(1 + .10)12 = 100[1/.10 – 1/.313843] + 1000/3.138428 = 100[10 – 3.186308] + 318.6308 = 100[6.813692] + 318.6308 = 681.3692 + 318.6308 = $1,000 $850 = $100/ (1 + rd)1 + … + $100/ (1 + rd)12 + $1,000/ (1 + rd)12 $850 = 100/(1 + .10)1 + … +100/(1 + .10)12 + 1000/(1 + .10)12 $850 = $1000 t=1NINT1+YTMt+M1+YTMN = 12.48% 6-6 Pg. 259 Suppose rRF = 5%, rM = 10%, and rA = 12% a. Calculate Stock A’s beta b. If Stock A’s beta were 2.0, then what would be A’s new required rate of return? rA = Risk-free rate + (Market risk premium)(Beta of Stock A) rA = rRF + (RPM)bA 12 = 5 + (rM – rRF)bA 12 – 5 = (10 – 5)bA 7 = 5bA 7/5 = bA 1.40 = bA BA = 2.0 RA = 5 + (5)2.0 RA = 5 + 10 RA = 15% 6-10 Pg. 259 You have a $2 million portfolio consisting of a $100,000 investment in each of 20 different stocks. The portfolio has a beta of 1.1. You are considering selling $100,000 worth of one stock with bet of 0.9 and using the proceeds to purchase another stock with beta of 1.4. What is the portfolio’s new beta be after these transactions? =100,000/2,000,000 = 0.05 Bp = 0.05(1.1) + 0.05(1.1) + … +0.05(1.1) = 1.1 Bp2 = 0.05(1.1) + 0.05(1.1) + … + 0.05(0.9) = 1.09 BN = bp – (bN2 – bN1) = 1.1 – (0.05(1.4) + 0.05(1.4) + … + 0.05(0.9)) – (0.05(1.4) + 0.05(1.4) + … + 0.05(1.4)) = 1.1 – (1.375 – 1.4) = 1.1 – (-0.025) =…...

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