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Expected return A stock's returns have the following distribution: Demand for the Company's Products Probability of Rate of This Return If Demand This Occurring Demand Occurs Weak 0.2 -44% Below average 0.2 -5 Average 0.3 15 Above average 0.1 30 Strong 75 0.2 1.0 1. Calculate the stock's expected return. Round your answer to two decimal places. % 2. Calculate the stock's standard deviation. Do not round intermediate calculations. Round your answer to two decimal places. % 3. Calculate the stock's coefficient of variation. Round your answer to two decimal places. Portfolio beta An individual has $15,000 invested in a stock with a beta of 0.4 and another $35,000 invested in a stock with a beta of 2.0. If these are the only two investments in her portfolio, what is her portfolio's beta? Round your answer to two decimal places. Required rate of return Assume that the risk-free rate is 6.5% and the required return on the market is 12%. What is the required rate of return on a stock with a beta of 1.5? Round your answer to two decimal places. % Expected and required rates of return Assume that the risk-free rate is 3% and the market risk premium is 8%. a. What is the required return for the overall stock market? Round your answer to two decimal places. % b. What is the required rate of return on a stock with a beta of 0.5? Round your answer to two decimal places. % Beta and required rate of return A stock has a required return of 9%; the risk-free rate is 2.5%; and the market risk premium is 3%. 1. What is the stock's beta? Round your answer to two decimal places. 2. If the market risk premium increased to 9%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. 1. If the stock's beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium. 2. If the stock's beta is less than 1.0, then the change in required rate of return will be greater than the change in the market risk premium. 3. If the stock's beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium. 4. If the stock's beta is equal to 1.0, then the change in required rate of return will be greater than the change in the market risk premium. 5. If the stock's beta is equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium. 1. New stock's required rate of return will be %. Round your answer to two decimal places. Expected returns Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.2 -6% -40% 0.2 6 0 0.3 15 24 0.2 23 27 0.1 34 47 1. Calculate the expected rate of return, rB, for Stock B (rA = 12.50%.) Do not round intermediate calculations. Round your answer to two decimal places. % 2. Calculate the standard deviation of expected returns, ?A, for Stock A (?B = 27.80%.) Do not round intermediate calculations. Round your answer to two decimal places. % 3. Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places. Portfolio required return Suppose you are the money manager of a $4.99 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta A $ 440,000 1.50 B 760,000 - 0.50 C 1,340,000 1.25 D 2,450,000 0.75 If the market's required rate of return is 13% and the risk-free rate is 7%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places. % Madsen Motors's bonds have 7 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 9.5%; and the yield to maturity is 12%. What is the bond's current market price? Round your answer to the nearest cent. $ Yield to maturity and future price A bond has a $1,000 par value, 8 years to maturity, and a 6% annual coupon and sells for $930. a. What is its yield to maturity (YTM)? Round your answer to two decimal places. % b. Assume that the yield to maturity remains constant for the next 5 years. What will the price be 5 years from today? Do not round intermediate calculations. Round your answer to the nearest cent. $ Bond valuation Nesmith Corporation's outstanding bonds have a $1,000 par value, a 11% semiannual coupon, 16 years to maturity, and an 8.5% YTM. What is the bond's price? Round your answer to the nearest cent. $ Bond valuation Madsen Motors's bonds have 7 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 9.5%; and the yield to maturity is 12%. What is the bond's current market price? Round your answer to the nearest cent. Bond valuation An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 19 years, while Bond S matures in 1 year. Assume that only one more interest payment is to be made on Bond S at its maturity and that 19 more payments are to be made on Bond L. a. What will the value of the Bond L be if the going interest rate is 4%? Round your answer to the nearest cent. $ What will the value of the Bond S be if the going interest rate is 4%? Round your answer to the nearest cent. $ What will the value of the Bond L be if the going interest rate is 10%? Round your answer to the nearest cent. $ What will the value of the Bond S be if the going interest rate is 10%? Round your answer to the nearest cent. $ What will the value of the Bond L be if the going interest rate is 12%? Round your answer to the nearest cent. $ What will the value of the Bond S be if the going interest rate is 12%? Round your answer to the nearest cent. $ b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change? I. The change in price due to a change in the required rate of return increases as a bond's maturity decreases. II. Long-term bonds have greater interest rate risk than do short-term bonds. III. The change in price due to a change in the required rate of return decreases as a bond's maturity increases. IV. Long-term bonds have lower interest rate risk than do short-term bonds. V. Long-term bonds have lower reinvestment rate risk than do short-term bonds. Interest rate sensitivity An investor purchased the following 5 bonds. Each bond had a par value of $1,000 and an 8% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell, and each then had a new YTM of 5%. What is the percentage change in price for each bond after the decline in interest rates? Fill in the following table. Round your answers to the nearest cent or to two decimal places. Enter all amounts as positive numbers. Price @ 8% Price @ 5% Percentage Change 10-year, 10% annual coupon $ $ % 10-year zero $ $ % 5-year zero $ $ % 30-year zero $ $ % $100 perpetuity $ $ % Yield to call Six years ago the Templeton Company issued 18-year bonds with a 15% annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 years of call protection. Today Templeton called the bonds. a. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places. Expected return A stock's returns have the following distribution: Demand for the Company's Products Probability of Rate of This Return If Demand This Occurring Demand Occurs Weak 0.2 -44% Below average 0.2 -5 Average 0.3 15 Above average 0.1 30 Strong 75 0.2 1.0 1. Calculate the stock's expected return. Round your answer to two decimal places. % 12.70 2. Calculate the stock's standard deviation. Do not round intermediate calculations. Round your answer to two decimal places. % 38.90 3. Calculate the stock's coefficient of variation. Round your answer to two decimal places. 3.06 Portfolio beta An individual has $15,000 invested in a stock with a beta of 0.4 and another $35,000 invested in a stock with a beta of 2.0. If these are the only two investments in her portfolio, what is her portfolio's beta? Round your answer to two decimal places. 1.52 Required rate of return Assume that the risk-free rate is 6.5% and the required return on the market is 12%. What is the required rate of return on a stock with a beta of 1.5? Round your answer to two decimal places. % 14.75 Expected and required rates of return Assume that the risk-free rate is 3% and the market risk premium is 8%. a. What is the required return for the overall stock market? Round your answer to two decimal places. % 11.00 b. What is the required rate of return on a stock with a beta of 0.5? Round your answer to two decimal places. % 7.00 Beta and required rate of return A stock has a required return of 9%; the risk-free rate is 2.5%; and the market risk premium is 3%. 1. What is the stock's beta? Round your answer to two decimal places. 2.17 2. If the market risk premium increased to 9%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. 1. If the stock's beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium. 2. If the stock's beta is less than 1.0, then the change in required rate of return will be greater than the change in the market risk premium. 3. If the stock's beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium. 4. If the stock's beta is equal to 1.0, then the change in required rate of return will be greater than the change in the market risk premium. 5. If the stock's beta is equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium. 1. New stock's required rate of return will be %. Round your answer to two 22.03 decimal places. Expected returns Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.2 -6% -40% 0.2 6 0 0.3 15 24 0.2 23 27 0.1 34 47 1. Calculate the expected rate of return, rB, for Stock B (rA = 12.50%.) Do not round intermediate calculations. Round your answer to two decimal places. % 9.30 2. Calculate the standard deviation of expected returns, ?A, for Stock A (?B = 27.80%.) Do not round intermediate calculations. Round your answer to two decimal places. % 27.8 3. Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places. 2.99 Portfolio required return Suppose you are the money manager of a $4.99 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta A $ 440,000 1.50 B 760,000 - 0.50 C 1,340,000 1.25 D 2,450,000 0.75 If the market's required rate of return is 13% and the risk-free rate is 7%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places. % 11.56 Madsen Motors's bonds have 7 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 9.5%; and the yield to maturity is 12%. What is the bond's current market price? Round your answer to the nearest cent. $ 885.91 Yield to maturity and future price A bond has a $1,000 par value, 8 years to maturity, and a 6% annual coupon and sells for $930. a. What is its yield to maturity (YTM)? Round your answer to two decimal places. 7.18% b. Assume that the yield to maturity remains constant for the next 5 years. What will the price be 5 years from today? Do not round intermediate calculations. Round your answer to the nearest cent. $ 969.12 Bond valuation Nesmith Corporation's outstanding bonds have a $1,000 par value, a 11% semiannual coupon, 16 years to maturity, and an 8.5% YTM. What is the bond's price? Round your answer to the nearest cent. $ 1,216.48 Bond valuation Madsen Motors's bonds have 7 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 9.5%; and the yield to maturity is 12%. What is the bond's current market price? Round your answer to the nearest cent. $ 885.91 Bond valuation An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 19 years, while Bond S matures in 1 year. Assume that only one more interest payment is to be made on Bond S at its maturity and that 19 more payments are to be made on Bond L. a. What will the value of the Bond L be if the going interest rate is 4%? Round your answer to the nearest cent. $ 1,788.04 What will the value of the Bond S be if the going interest rate is 4%? Round your answer to the nearest cent. $ 1,057.69 What will the value of the Bond L be if the going interest rate is 10%? Round your answer to the nearest cent. $ 1,000.00 What will the value of the Bond S be if the going interest rate is 10%? Round your answer to the nearest cent. $ 1,000.00 What will the value of the Bond L be if the going interest rate is 12%? Round your answer to the nearest cent. $ 852.68 What will the value of the Bond S be if the going interest rate is 12%? Round your answer to the nearest cent. $ 982.14 b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change? I. The change in price due to a change in the required rate of return increases as a bond's maturity decreases. II. Long-term bonds have greater interest rate risk than do short-term bonds. III. The change in price due to a change in the required rate of return decreases as a bond's maturity increases. IV. Long-term bonds have lower interest rate risk than do short-term bonds. V. Long-term bonds have lower reinvestment rate risk than do short-term bonds. Interest rate sensitivity yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell, and each then had a new YTM of 5%. What is the percentage change in price for each bond after the decline in interest rates? Fill in the following table. Round your answers to the nearest cent or to two decimal places. Enter all amounts as positive numbers. Price at 8% 10-year, 10% annual coupon $1,134.20 Price at 5% $1,386.09 Change 22.21% 10-year zero 463.19 613.91 32.54 5-year zero 680.58 783.53 15.12 30-year zero 99.38 231.37 132.77 $100 perpetuity 1,250.00 1,428.57 14.29 Yield to call Six years ago the Templeton Company issued 18-year bonds with a 15% annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 years of call protection. Today Templeton called the bonds. a. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places. The rate of return is approximately 15.03%, found with a calculator using the following inputs: N = 6; PV = -1000; PMT = 150; FV = 1090; I/YR = ? Solve for I/YR = 16.00%