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Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%. What is the current market price of these bonds?

VB = INT*r*[1 -(1+rd)-n]/i + M*(1+rd)-n INT = par value M= maturity value r = coupon rate per coupon payment period rd= effective interest rate per coupon payment period n = number of coupon payments remaining INT = 1000. And, since we are not given the maturity value, we can assume that it is the same as the par value. Therefore, M = 1000. r = .08 i = .09 n = 12 Market price of the bonds=1000*.08 * (1 - 1.09-12)/.09 + 1000*1.09-12 Market price of the bonds = $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%. The bonds sell at a price of $850. What is their yield to maturity? Time to maturity = 12 years Par value = $1,000 Coupon rate = 10% Price of the bond = $850 Value of the bond t=1nPar value*Coupon rate1+YTMt+Par value1+YTMn Par value =$1,000 Coupon rate =10% Time to maturity =12 years Yield to maturity =12.475%

in general. Given this information.6 its expected return increases from 10 percent to 14 percent.0821 = $80/PV PV = $80/0. In order to solve for I/YR we need PV.2 (6-1) Portfolio Beta . and the market risk premium is 5 percent. What is the maturity risk premium for the 2-year security? r = r* + IP + MRP 6. ri =1. If the company’s beta doubles from 0. ri =2.3%.80 5. bi =4. given the following facts: N = 5.3 – 6 MRP = 0.65%.3 5.7 The problem asks you to find the price of a bond.8 to 1. FV = 1000.4 = 6 + MRP MRP = 6. 6. A 2-year Treasury security yields 6.25. With an excel . Solve for I/YR = YTM = 8. PMT = 80. bi =2. PV = -974. 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. we can find PV.085.3 = 3 + 3 + MRP 6. and FV = 1000. and FV = 1000.4.6. I/YR = 8. and inflation is expected to be 3% for the next 2 years.42.4 If rRF=0. you are also given that the current yield is equal to 8. rpM =0.5/2 = 4.0821 = $974.21%. Current yield = Annual interest/Current price 0. a company’s expected return will not double when its beta doubles.42.6 According to the Security Market Line (SML) equation.6. Therefore. PMT = 50.13 The problem asks you to solve for the YTM. PMT = 80. For example. solve for the YTM with excel : N = 5. rpM =0. Now. ri = rRF +(rM -rRF)bi = rRF +( rpM) bi If rRF=0. assume that the risk-free rate is 6 percent. given the following facts: N = 16.4. However. solve for PV = $1.5-6 Maturity Risk Premium The real risk-free rate is 3%.

and bi = 1.4 .000/$75. What is ri.An individual has $35.3. If the rRF is decreased to 8% then the Rm will decrease by 1%.8 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%.6%) 0. A. the required rate of return on Stock i? Ri = rRF + (Rm – rRF) bi Ri = 9% + (14% .000 invested in a stock with a beta of 0.4. rM = 14%.000 invested in a stock with a beta of 1.9%) 1. The slope of the SML remains constant. Now assume rRF remains at 9% but rM (1) increases to 16% or (2) falls to 13%. Ri = 10% + (15% .3 Ri = 14.5% Ri = 8% + (13% -8%) 1.5% C.000)(0.7 Ri = 10. What is the required rate of return on a stock that has a beta of 0.Now suppose rRF (1) increases to 10% or (2) decreases to 8%.8) + ($40. How would these changes affect ri? 0.000 40.000 ($35.000/$75.000)(1.5 % B.8 and another $40.3 Ri = 15.7? R i = rRF + (Rm – rRF) bi Ri = 6% + (13% . The slope of the SML does not remain constant. If these are the only two investments in her portfolio. what is her portfolio’s beta? Investment Beta $35.10%) 1.000 $75.4) = 1. How would this affect rM and ri? The Rm will increase by 1% if the rRF is increased by 1%.12 Bp = 1.9 % (6-7) Required Rate of Return Suppose rRF = 9%.3 Ri = 16.

Ri = rRF + (Rm – rRF) bi Ri = 9% + (16% .3 Ri = 18.9%) 1.1 % Ri = 9% + (13% .3 Ri = 14.2% .9%) 1.

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