# ————————————————- is PMT=8%. The bonds have a

### ————————————————- is PMT=8%. The bonds have a

————————————————- Chapter 5: Bonds, Bond Valuation, and Interest Rates (5–1) Bond Valuation with Annual Payments Jackson Corporation’s bonds have N=12 years remaining to maturity.

Interest is paid annually, the bonds have a FV=\$1,000 par value, and the coupon interest rate is PMT=8%. The bonds have a yield to maturity of I=9%. What is the current market price of these bonds? \$928. 39 Calculator solution: Input: N = 12, I = 9, PMT = 80, FV = 1000, Solve for PV = \$928. 39 (5–2) Yield to Maturity for Annual Payments 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%.

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The bonds sell at a price of \$850. What is their yield to maturity? .12475 or 12. 48% Calculator solution: Input N = 12, PV = -850, PMT = 100, FV = 1000, and solve for I = rd = %. Or Yield to maturity (financial) calculator. | Sources: http://www. moneychimp.

com/calculator/bond_yield_calculator. htm | (5–3) Current Yield for Annual Payments Heath Foods’s bonds has 7 years remaining to maturity. The bonds have a face value of \$1,000 and a yield to maturity of 8%.They pay interest annually and have a 9% coupon rate. What is their current yield? 8. 55% Calculator solution: N=7,I/Y=8, PMT=90, fv=1000,CPT PV= 1052.

06 current yield = coupon/current price Thus, current yield=90/1052. 06=8. 55% years to maturity| 7| face value of | \$1,000| yield to maturity of | 8%| coupon rate| 9%| (5–6) Maturity Risk Premium The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6. 3%. What is the maturity risk premium for the 2-year security? 0.

3% r2| =| r*| +| IP| +| DRP| +| LP| +| MRP| . 3%| =| 3%| +| 3%| +| 0| +| 0| +| MRP| 6. 3% = 6% + MRP MRP = 6. 3 – 6 MRP = 0. 3% (5–7) Bond Valuation with Semiannual Payments Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of \$1,000, and a yield to maturity of 8.

5%. What is the price of the bonds? \$1,085. 80 C = 10%/2 of 1000 = 50, n =8 x 2 = 16, m = 1000, I = 8.

5%/2 = 4. 25% = 50 x 1-1/ (1+0. 0425) 16/0. 0425 + 1000/ (1+.

0425) 16 = \$1,084. 84 Calculator solution: FV = 1,000| PMT = 50| N = 16| I = 8. 5/2 = 4. 5%| Present Value = \$1,085. 80| (5–13) Yield to Maturity and Current Yield You just purchased a bond that matures in 5 years.

The bond has a face value of \$1,000 and has an 8% annual coupon. The bond has a current yield of 8. 21%. What is the bond’s yield to maturity? 8. 65% CURRENT YIELD| =| ANNUAL COUPON| | PV| 0. 0821| =| 80| | PV| PV = 80 0. 0821 = 974.

42 Calculator solution: N = 5; PMT = 80; FV=1000; PV = 974. 42 CPT I/Y I/Y = 8. 65% ————————————————- Chapter 6: Risk, Return, and the Capital Asset Pricing Model 6-6 Beta and expected returnIf a company’s beta were to double, would its expected return double? According to the Security Market Line (SML) equation, an increase in beta will increase a company’s expected return by an amount equal to the market risk premium times the change in beta. For example, assume that the risk-free rate is 6%, and the market risk premium is 5%. If the company’s beta doubles from 0.

8 to 1. 6 its expected return increases from 10% to 14%. Therefore, in general, a company’s expected return will not double when its beta doubles. uwf.

edu/rconstand/GEB5874/Text11th/… /solutions_nss_nc_8. doc 6–1) Portfolio Beta An individual has \$35,000 invested in a stock with a beta of 0. 8 and another \$40,000 invested in a stock with a beta of 1.

4. If these are the only two investments in her portfolio, what is her portfolio’s beta? Investment| Beta| \$35,000| . o8| \$40,000| 1. 4| Total \$75,000| | bp = (\$35,000/\$75,000)(0.

8) + (\$40,000/\$75,000)(1. 4) = 1. 12 (6–2) Required Rate of Return Assume that the risk-free rate is 6% and that the expected return on the market is 13%.

What is the required rate of return on a stock that has a beta of 0. 7? r| = rRF + (rM – rRF)b| | = 6% + (13% – 6%) 0. | | = 10. 9%| (6–7) Required Rate of Return Suppose rRF = 9%, rM = 14%, and bi = 1. 3.

a. What is ri, the required rate of return on Stock i? ri = rRF + bi(RPM)| ri = rRF + bi(rM – rRF)| ri = 6% + 0. 5(11% – 6%)| ri = | 15. 50%| b. Now suppose rRF (1) increases to 10% or (2) decreases to 8%. The slope of the SML remains constant.

How would this affect rM and ri? 1: INCREASE| | Risk-free rate| 9%| Beta| 1. 30 | Old market return| 14%| Change in rate| 1. 0%| New market return or r(m)| 15. 00%| Required return or r(i)| 16. 5%| |  | |  | 2: DECREASE| | Risk-free rate| 9%| Beta| 1.

30|Old market return| 14%| Change in rate| -1. 0%| New market return| 13. 0%| Required return| 14. 20%| c. Now assume rRF remains at 9% but rM (1) increases to 16% or (2) falls to 13%. The slope of the SML does not remain constant.

How would these changes affect ri? 1: INCREASE| | Risk-free rate| 9%| Beta| 1. 30 | Old market return| 14%| Change in rate| 2. 0%| New market return or r(m)| 16. 00%| Required return or r(i)| 18. 1%| |  | |  | 2: DECREASE| | Risk-free rate| 9%| Beta| 1.

30| Old market return| 14%| Change in rate| -1. 0%| New market return| 13. 0%| Required return| 14. 20%| 