Homework 7 & 8; Show all calculations Chapter 7 BOND VALUATION An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 8.2%. Bond C pays an 11.5% annual coupon, while Bond Z is a zero-coupon bond. a. Assuming that the yield to maturity of each bond remains at 8.2% over the next 4 years, calculate the price of the bonds at each of the following years to maturity: Time Years to Maturity Price of Bond C Price of Bond Z t=0 4 t=1 3 t=2 2 t=3 1 t=4 0 b. Plot the time path of prices for each bond. Chapter 8 8.6 EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future return Probability A B 0.1 -10% -35% 0.2 2 0 0.41 12 20 3 t = 2 2 t=3 1 t = 4 0 b. Plot the time path of prices for each bond. Chapter 8 8.6 EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future retum Probability B 0.1 -10% -35% 0.2 2 0 0.4 12 20 0.2 30 25 0.1 38 45 a. Calculate the expected rate of return, rg for Stock B (ra= 12%). b. Calculate the standard deviation of expected returns, os for Stock A (08 = 20.35%). Now calculate the coefficient of variation for Stock B. Is it possible that most investors will regard Stock B as being less risky than Stock A? Explain. c. Assume the risk-free rate is 2.5%. What are the Sharpe ratios for Stocks A and B? Are these calculations consistent with the information obtained from the coefficient of variation calculations in part b? Explain