Complete tabs 7.2, 7.5, 7.15, 7.19, and 7.24 in the attached Chapter 7 Excel spreadsheet. Complete tabs 8.1, 8.6, 8.9, 8.11, and 8.26 in the attached Chapter 8 Excel spreadsheet. An EXAMPLE tab is provided in each spreadsheet for your guidance. You must use formulas in the spreadsheet to show your work.

8.3. Bond price: Knight, Inc., has issued a three-year bond that pays a coupon of 6.10 percent. Coupon payments are made semiannually. Given the market rate of interest of 5.80 percent, what is the market value of the bond? Coupon rate 6.10% Number of years to maturity 3 Market rate of interest 5.80% # of coupon payments per year 2 Market value of bond Alternate solution: n 3 coupon rat 6.10% m 2 i% 5.80% PAR $1,000.00 $1,008.15 6 3.05% 2.90% PMT 30.5 PVIF PVIFA PAR 0.84238 5.43519 $1,000.00 VALUE $1,008.15 8.1 Bond price: BA Corp is issuing a ten-year bond with a coupon rate of 8 percent. The interest rate for similar bonds is currently 6 percent. Assuming annual payments, what is the value of the bond? 8.2 Bond price: Pierre Dupont just received a cash gift from his grandfather. He plans to invest in a five-year bond issued by Venice Corp that pays an annual coupon of 5.5 percent. If the current market rate is 7.25 percent, what is the maximum amount Pierre should be willing to pay for this bond? 8.4 Bond price: Regatta Inc. has seven-year bonds outstanding that pay a 12 percent coupon rate. Investors buying these bonds today can expect to earn a yield to maturity of 8.875 percent. What is the current value of these bonds? Assume annual coupon payments. 8.5 Bond price: You are interested in investing in a five-year bond that pays 7.8 percent coupon with interest to be received semiannually. Your required rate of return is 8.4 percent. What is the most you would be willing to pay for this bond? 8.6 Zero coupon bonds: Diane Carter is interested in buying a five-year zero coupon bond whose face value is $1,000. She understands that the market interest rate for similar investments is 9 percent. Assume annual coupon payments. What is the current value of this bond? 8.7 Zero coupon bonds: Ten-year zero coupon bonds issued by the U.S. Treasury have a face value of $1,000 and interested is compounded semiannually. If similar bonds in the market yield 10.5 percent, what is the value for these bonds? 8.8 Zero coupon bonds: Northrop Real Estate Company is planning to fund a development project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual compounding, what will be the price of these bonds if the appropriate discount rate is 14 percent? 8.9 Yield to maturity: Ruth Hornsby is looking to invest in a three-year bond that pays semiannual coupon payments at a rate of 5.875 percent. If these bonds have a market price of $981.13, what yield to maturity and effective annual yield can she expect to earn? 8.10 Yield to maturity: Rudy Sandberg wants to invest in four-year bonds that are currently priced at $868.43. These bonds have a coupon rate of 6 percent and pay semiannual coupon payments. What is the current market yield on this bond? 8.11 Realized yield: Josh Kavern bought ten-year, 12 percent coupon bonds issued by the U.S. Treasury three years ago at $913.44. If he sells these bonds, which have a face value of $1,000, at the current price of $804.59, what is the realized yield on the bonds? Assume similar coupon-paying bonds make annual coupon payments. 8.12 Realized yield: Four years ago, Lisa Stills bought six-year, 5.5 percent coupon bonds issued by the Fairways Corp. for $947.68. If she sells these bonds at the current price of $894.52, what will be the realized yield on the bonds? Assume similar coupon-paying bonds make annual coupon payments. 8.13 Bond price: The International Publishing Group is raising $10 million by issuing fifteen-year bonds with a coupon rate of 8.5 percent. Coupon payments will be be made annually. Investors buying the bonds today will earn a yield to maturity of 8.5 percent. At what price will the bonds sell in the marketplace? Explain. 8.14 Bond price: Pullman Corp issued ten-year bonds four years ago with a coupon rate of 9.375 percent. At the time of issue, the bonds sold at par. Today bonds of similar risk and maturity must pay an annual coupon of 6.25 percent to sell at par value. Assuming semiannual coupon payments, what will be the current market price of the firm's bonds? 8.15. Bond price: Marshall Company is issuing eight-year bonds with a coupon rate of 6.5 percent and semiannual coupon payments. If the current market rate for similar bonds is 8 percent, what will be the bond price? If the company wants to raise $1.25 million, how many bonds does the firm have to sell? 8.16. Bond price: Rockne, Inc., has outstanding bonds that will mature in six years and pay an 8 percent coupon semiannually. If you paid $1,036.65 today and your required rate of return was 6.6 percent, did you pay the right price for the bond? 8.17. Bond price: Nanotech, Inc., has a bond issue maturing in seven years and paying a coupon rate of 9.5 percent (semiannual payments). The company wants to retire a portion of the issue by buying the securities in the open market. If it can refinance at 8 percent, how much will Nanotech pay to buy back its current outstanding bonds? 8.18. Zero coupon bonds: Kintel, Inc., wants to raise $1 million by issuing six-year zero coupon bonds with a face value of $1,000. Its investment banker states that investors would use an 11.4 percent discount rate on such bonds. At what price would these bonds sell in the marketplace? How many bonds would the firm have to issue to raise $1 million? Assume semiannual coupon payments. 8.19. Zero coupon bonds: Rockinghouse Corp. plans to issue seven-year zero coupon bonds. It has learned that these bonds will sell today at a price of $439.76. Assuming annual interest payments, what is the yield to maturity on these bonds? 8.20. Yield to maturity: Electrolex, Inc., has four-year bonds outstanding that pay a coupon rate of 6.6 and make coupon payments semiannually. If these bonds are currently selling at $914.89, what is the yield to maturity that an investor can expect to earn on these bonds? What is the effective annual yield? 8.21. Yield to maturity: Serengeti Corp. has five-year bonds outstanding that pay a coupon of 8.8 percent. If these bonds are priced at $1,064.86, what is the yield to maturity on these bonds? Assume semiannual coupon payments. What is the effective annual yield? 8.22. Yield to maturity: Adrienne Dawson is planning to buy ten-year zero coupon bonds issued by the U.S. Treasury. If these bonds with a face value of $1,000 and are currently selling at $404.59, what is the expected return on them? Assume that interest compounds semiannually on similar coupon paying bonds. 8.23. Realized yield: Brown & Co. issued seven-year bonds two years ago that can be called after five years. The bond makes semiannual coupon payments at a coupon rate of 7.875 percent. Each bond has a market value of $1,053.40, and the call price is $1,078.75. If the bonds are called by the firm today, what is the investor's realized return? 8.24. Realized yield: Trevor Price bought ten-year bonds issued by Harvest Foods five years ago for $936.05. The bonds make semiannual coupon payments at a rate of 8.4 percent. If the current price of the bond is $1,048.77 each, what is the yield that Trevor would earn by selling the bonds today? 8.25. Realized yield: You bought a six-year bond issued by Runaway Corp. four years ago. At that time, you paid $974.33 for the bond. The bond pays a coupon rate of 7.375 percent, and interest is paid semiannually. Currently the bond is priced at $1,023.56. What yield can you expect to earn on this bond if you sell it today? 8.26 Lopez Information Systems is planning to issue ten-year bonds. The going market rate for such bonds is 8.125 percent. Assume that coupon payments will be made semiannually. The firm is trying to decide between issuing an 8 percent coupon bond or a zero coupon bond. The company needs to raise $1 million. a. b. c. d. What will be the price of an 8 percent coupon bonds? How many coupon bonds would have to be issued? What will be the price of the zero coupon bonds? How many zero coupon bonds will have to be issued? 8.27. Showbiz, Inc., has issued eight-year bonds with a coupon of 6.375 percent and semiannual coupon payments. The market's required rate of return on such bonds is 7.65 percent. a. What is the market price of these bonds? b. Now assume that the above bond is callable after five years at an 8.5 percent premium on the face value. What is the expected return on this bond? 8.28. Peabody Corp. has seven-year bonds outstanding. The bonds pay a coupon of 8.375 percent semiannually and are currently worth $1,063.49. The bonds can be called in three years at a price of $1,075. a. b. c. d. What is the yield to maturity on the bond? What is the effective annual yield? What is the yield to call on the bond? If you plan to invest in one of these bonds today, what is the expected yield on the investment? Explain. 8.29. The Maryland Department of Transportation has issued 25-year bonds that pay semiannual coupon payments at a rate of 9.875 percent. The current market rate for similar securities is 11 percent. a. b. c. d. What is the bond's current market value? What will be the bond's price if rates in the market (i) decrease to 9 percent or (ii) increase to 12 percent? Refer to your answers in part b. How do the interest rate changes affect premium bonds and discount bonds? Suppose the bond were to mature in 12 years. How do the interest rate changes in part b affect the bond prices? 8.30. Rachette Corp. has 18-year bonds outstanding. These bonds, which pay interest semiannual, have a coupon rate of 9.735 percent and a yield to maturity of 7.95 percent. a. b. c. Compute the current price of these bonds. If the bond can be called in five years at a premium of 13.5 percent over par value, what is the investor's realized yield? If you bought one of these bonds today, what is your expected rate of return? Explain. 8.31 Zippy Corporation just sold $30 million of convertible bonds with a conversion ratio of 40. each $1,000 bond is convertible into 25 shares of Zippy's stock. a. b. What is the conversion price of Zippy's stock? If the current price of Zippy's stock is $15 and the Company's annual return is normally distributed with a standard deviation of $5, what is the probability that investors will find it attractive to convert the bond into Zippy stock in the next year? STP #8.1. Seven years ago, Eastern Corporation issued 20-year bonds that had a $1000 face value, paid interest annually, and that had a coupon rate of interest of 7 percent. If the market rate of interest is 5.5 percent today, what is the current price of an Eastern Corporation bond? Are these bonds selling at a premium or discount? STP #8.2. You are considering investing in a 10-year zero coupon bond that compounds interest semiannually. If the current market rate is 5.65 percent, what is the maximum price you should have to pay for this bond? STP #8.3. Bigbox, Inc. has bonds outstanding that will mature in eight years. These bonds pay interest semiannually and have a coupon rate of 4.6 percent. If the bonds are currently selling at $888.92, what is the yield to maturity that an investor who buys them today can expect to earn? What is the effective annual yield? 7.12. The security market line: If the expected return on the market is 10 percent and the risk-free rate is 4 percent, what is the expected return for a stock with a beta equal to 1.5? What is the market risk premium for the set of circumstances described? Expected return on the market E(Rm) Risk-free rate Beta Rf Stock's expected return (Rcs) 13% Market risk premium E(Rm) Rf 6% 10% 4% 1.5 7.2. Expected returns: John is watching an old game show rerun on television called Let's Make a Deal in which the contestant chooses a prize behind one of two curtains. Behind one of the curtains is a gag prize worth $150, and behind the other is a round-the world trip worth $7,200. The game show has placed a subliminal message on the curtain containing the gag prize, which makes the probability of choosing the gag prize equal to 75 percent. What is the expected value of the selection, and what is the standard deviation of that selection? 7.3. Expected returns: You have chosen biology as your college major because you would like to be a medical doctor. However, you find that the probability of being accepted to medical school is about 10 percent. If you are accepted to medical school, then your starting salary when you graduate will be $300,000 per year. However, if you are not accepted, then you would choose to work in a zoo, where you will earn $40,000 per year. Without considering the additional educational years or the time value of money, what is your expected starting salary as well as the standard deviation of that starting salary? 7.5. Single asset portfolios: Stocks A, B, and C have expected returns of 15 percent, 15 percent, and 12 percent, respectively, while their standard deviations are 45 percent, 30 percent, and 30 percent respectively. If you were considering the purchase of each of these stocks as the only holding in your portfolio and the risk-free rate is 0 percent, which stock should you choose? 7.13. Expected returns: Jose is thinking about purchasing a soft drink machine and placing it in a business office. He knows that there is a 5 percent probability that someone who profit on each soft drink sold is $0.10. If Jose expects a thousand people per day to pass by the machine and requires a complete return of his investment in one year, then what is the maximum price that he should be willing to pay for the soft drink machine? Assume 250 working days in a year, and ignore taxes and the time value of money. 7.14. Interpreting the variance and standard deviation: The distribution of grades in an introductory finance class is normally distributed, with an expected grade of 75. If the standard deviation of grades is 7, in what range would you expect 95 percent of the grades to fall? 7.15. Calculating the variance and standard deviation: Kate recently invested in real estate with the intention of selling the property one year from today. She has modeled the returns on that investment based on three economic scenarios. She believes that if the economy stays healthy, then her investment will generate a 30 percent return. However, if the economy softens, as predicted, the return will be 10 percent, while the return will be 25 percent if the economy slips into a recession. If the probabilities of the healthy, soft, and recessionary states are 0.4, 0.5, and 0.1, respectively, then what are the expected return and the standard deviation of the return on Kate's investment? 7.16. Calculating the variance and standard deviation: Barbara is considering investing in a stock and is aware that the return on that investment is particularly sensitive to how the economy is performing. Her analysis suggests that four states of the economy can affect the return on the investment. Using the table of returns and probabilities below, find the expected return and the standard deviation of the return on Barbara's investment. 7.17. Calculating the variance and standard deviation: Ben would like to invest in gold and is aware that the returns on such an investment can be quite volatile. Use the following table of states, probabilities, and returns to determine the expected return and the standard deviation of the return on Ben's gold investment. 7.18. Single asset portfolios: Using the information from problems 7.15, 7.16, and 7.17, calculate each coefficient of variation. Problem 7.15 State of the Economy Healthy Soft Recession Probability 0.4 0.5 0.1 Problem 7.16 Prob Boom 0.1 Good 0.4 Level 0.3 Slump 0.2 Return 25.00% 15.00% 10.00% -5.00% Problem 7.17 Prob Boom 0.1 Good 0.2 OK 0.3 Level 0.2 Slump 0.2 Return 40.00% 30.00% 15.00% 2.00% -12.00% Rate of return 30% 10% -25% 7.19. Portfolios with more than one asset: Emmy is analyzing a two-stock portfolio that consists of a Utility stock and a Commodity stock. She knows that the return on the Utility stock has a standard deviation of 40 percent and the return on the Commodity stock has a standard deviation of 30 percent. However, she does not know the exact covariance in the returns of the two stocks. Emmy would like to plot the variance of the portfolio for each of three casescovariance of 0.12, 0, and 0.12in order to understand how the variance of such a portfolio would react. Do the calculation for each of the extreme cases (0.12 and 0.12), assuming an equal proportion of each stock in your portfolio. 7.20. Portfolios with more than one asset: Given the returns and probabilities for the three possible states listed here, calculate the covariance between the returns of Stock A and Stock B. For convenience, assume that the expected returns of Stock A and Stock B are 11.75 percent and 18 percent, respectively. 7.24. CAPM: Damien knows that the beta of his portfolio is equal to 1, but does not know the risk-free rate of return or the market risk premium. He also knows that the expected return on the market is 8 percent. What is the expected return on Damien's portfolio? 7.25 CAPM: In February 2014 the risk free rate was 4.75 percent, the market risk premium was 6 percent and the beta for Twitter stock was 1.31. What is the expected return that is consistent with the systematic risk associated with the returns on Twitter stock? 7.26 CAPM: The market risk premium is 6 percent and the risk free rate is 5 percent. If the expected return on a bond is 6.5 percent, what is its beta? 7.27 David is going to purchase two stocks to form the initial holdings in his portfolio. Iron stock has an expected return of 15 percent, while Copper stock has an expected return of 20 percent. If David plans to invest 30 percent of his funds in Iron and the remainder in Copper, then what will be the expected return from his portfolio? What if David invests 70 percent of his funds in Iron stock? 7.29 In order to fund her retirement, Glenda requires a portfolio with an expected return of 12 percent per year over the next 30 years. She has decided to invest in Stocks 1, 2, and 3, with 25 percent in Stock 1, 50 percent in Stock 2, and 25 percent in Stock 3. If Stocks 1 and 2 have expected returns of 9 percent and 10 percent per year, respectively, then what is the minimum expected annual return for Stock 3 that will enable Glenda to achieve her investment requirement? 7.34 The expected return on the market portfolio is 15 percent, and the return on the risk-free security is 5 percent. What is the expected return on a portfolio with a beta equal to 0.5? 7.35 You have been provided the following data on the securities of three firms and the market: Security Stock A Stock B Stock C Market Portfolio Treasury-bills E[Ri] 0.15 0.15 0.1 0.1 0.05 Standard Deviation 0.18 0.02 0.04 0 Co-Variance 1.0 0.5 Beta 1.5 0.5 Assume the CAPM and SML are true and fill in the missing values in the table. Would you invest in the stock of any of the three firms? If so, which one(s) and why? STP7.1 Given the following information from Capstone Corporation, what price could CAPM predict that the company's stock will trade for 1 year from today. Assume that the risk free rate is 3 percent and that the market risk premium is 8 percent. STP7.2 You are considering investing in a mutual fund. The fund is expected to earn a return of 15 percent in the next year. If its annual return is normally distributed with a standard deviation of 6.5 percent, what return can you expect the fund to beat 95% of the time? STP7.3 You have just invested in a portfolio of three stocks. The amount of money that you invested in each stock and its beta are summarized below. Calculate the beta of the portfolio and used the capital asset pricing model (CAPM) to compute the expected rate of return for the portfolio. Assume that the expected rate of return on the market is 15 percent and that the risk-free rate is 7 percent. Stock Investment Beta A B C $200,000 300,000 500,000 1.50 0.65 1.25