# yjy

1.You read in *The
Wall Street Journal* that 30-day T-bills are currently yielding 2%. Your brother-in-law, a broker at Kyoto
Securities, has given you the following estimates of current interest rate
premiums on a 1 year bond:

·Liquidity premium = 3%.

·Maturity risk premium = 1.5%.

·Default risk premium = 1.2%.

On the basis of these data, what is the long term treasury bond rate?

r _{LTT}
= r* + IP + MRP = 2 + 1.5 = 3.5%

2.A Treasury bond that matures in 10 years has a yield of 4.5 percent. A 10-year corporate bond has a yield of 6 percent. Assume that the liquidity premium on the corporate bond is 0.6 percent. What is the default risk premium on the corporate bond?

r
_{LTC} = r* + IP + MRP + LP + DRP = 6 6
= 4.5 + 0.6 + DRP

r _{LTT} = r* + IP + MRP =
4.5 6
= 5.1 + DRP

0.9% = DRP

3.You read in *The
Wall Street Journal* that 30-day T-bills are currently yielding 0.5%. Your brother-in-law, a broker at Kyoto
Securities, has given you the following estimates of current interest rate
premiums on a 1 year bond:

·Liquidity premium = 0.5%.

·Maturity risk premium = 0.5%.

·Default risk premium = 1%.

On the basis of these data, what is the short term corporate bond rate?

r _{STC}
= r* + IP + LP + DRP = 0.5 + 0.5 + 1 = 2%

4.You read in *The
Wall Street Journal* that 30-day T-bills are currently yielding 1%. Your brother-in-law, a broker at Kyoto
Securities, has given you the following estimates of current interest rate
premiums on a 10 year bond:

·Liquidity premium = 1%.

·Maturity risk premium = 1%.

·Default risk premium = 2%.

On the basis of these data, what is the long term corporate bond rate?

r _{LTC} = r* + IP + MRP +
LP + DRP = 1 + 1 + 1 + 2 = 5%

5.The Carter
Company’s bonds mature in 6 years have a par value of $1,000 and an **annual** coupon payment of $70. The yield to maturity for the bonds is
9%. What is the price of these bonds?

N = 6

I/Y = 9

PV = $910.28

PMT = 70

FV = 1,000

6.The Carter
Company’s bonds mature in 8 years have a par value of $1,000 and a **semiannual** coupon payment of $60. The yield to maturity for the bonds is
7%. What is the price of these bonds?

N = 8×2 = 16

I/Y = 7/2 = 3.5

PV = $1,302.35

PMT = 60

FV = 1,000

7.A corporate bond
has a face value of $1,000, and 8 percent **semiannual**
coupon. The bond matures in 8 years and
sells at a price of $1,090. What is the
bond’s yield to maturity?

N = 8×2 = 16

I/Y = 3.27 x 2 = 6.54%

PV = -1,090

PMT = 80/2 = 40

FV = 1,000

8.Consider the same bond in question 7. The bond can be called in 4 years at a call price of $1,040. What is the bond’s yield to call?

N = 4×2 = 8

I/Y = 3.16 x 2 = 6.32%

PV = -1,090

PMT = 80/2 = 40

FV = 1,040

1.Roenfeld Corp believes the following probability distribution exists for its stock. What is the expected return, standard deviation and coefficient of variation on the company’s stock?

Probability Stock’s

State of of State Expected

the Economy Occurring Return

Boom 0.40 30%

Normal 0.50 12%

Recession 0.10 -10%

E (r) = 0.4(30) + 0.5(12) + 0.1(-10) = 12+6-1 = 17%

σ ^{2} = 0.4(30-17)^{ 2} + 0.5(12-17)^{ 2} + 0.1(-10-17)^{ 2}

σ ^{2 = }67.6 + 12.5 + 72.9

σ ^{2 = }153

σ = 12.37%

CV = σ / E (r) = 12.37 / 17 = 0.73

2.Cooley Company’s stock has a beta of 1.20, the risk-free rate is3%, and the market risk premium is6%. What is the return on the market? What is the firm’s required rate of return?

r = r _{f} + B (r _{m} – r _{f}) = 3 + 1.20(6) =
10.2%

MRP
= r _{m} – r _{f }

6
= r _{m }– 3

9
= r _{m}

3.Mike Flannery holds the following portfolio:

Stock Investment Beta

A $75,000 1.40

B 30,000 0.80

What is his portfolio’s beta?

Bp = (75,000/105,000)(1.40) + (30,000/105,000)(0.80) = 1 + 0.23 = 1.23

4.Assume that the risk-free rate is 2% and the expected return on the market is 12%. What is the required rate of return on a stock with a beta of 1.1?

r = r _{f} + B (r _{m}
– r _{f}) = 2 + 1.1(12 – 2) = 13%

5.A stock has a required return of 11%, the risk free rate is 2.5%, and the market risk premium is 8%. What is the stock’s beta? If the market risk premium increased to 10%, what would happen to the stock’s required rate of return? Assume that the risk-free rate and the beta remain unchanged.

r = r _{f} + B (r _{m}
– r _{f})

11 = 2.5 + B (8)

8.5 = B (8)

1.06 = B

r
= r _{f} + B (r _{m} – r _{f})

r = 2.5 + 1.06 (10)

r = 13.1%