Homework Essay

381 words - 2 pages

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
...view middle of the document...

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)
= 1.1250%

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