I need the answers and explanation/work to Chapter 9 review questions 1-10.

Chapter 8 Overview A key principle explained in this chapter is that with appropriate diversification, an investor can lower the risk of his/her portfolio without lowering the portfolio's expected rate of return. The expected return for a portfolio is the weighted average of the expected rates of return of the individual investments in that portfolio. However, the risk of a portfolio is not simply the weighted average of the standard deviations of the individual investments. Rather, diversificationi.e., combining investments which are less than perfectly positively correlatedcan result in a decrease in overall risk. Risk can be divided into diversifiable and nondiversifiable risk. Investors are assumed to combine securities into a portfolio in such a way as to diversify away all diversifiable risk. They are left then with only nondiversifiable risk. The Capital Asset Pricing Model (CAPM) is a major theory in finance. This theory suggests that beta is the appropriate measure of a stock's nondiversifiable or systematic risk. Further, the higher the stock's beta, the higher rate of return will be for this security. Key Terms Beta coefficient Capital asset pricing model (CAPM) Correlation coefficient Diversification Diversifiable risk Market portfolio Market risk premium Nondiversifiable risk Portfolio beta Security market line Systematic risk Unsystematic risk Skills 1. 2. 3. 4. Expected return of a portfolio of stocks Standard deviation of portfolio returns Portfolio Beta Expected Rate of Return using the CAPM pricing equation Problems 5. Describe what is meant by systematic and unsystematic risk. How does this distinction related to an investment's beta? 6. What is the range of the correlation coefficient? When does a portfolio benefit from reduced risk? What kind of risk is reduced? 7. Stock A has a beta of 1.2 and stock B has a beta of 0.95. If the riskfree rate is 4% and stock A's expected return is 10%, what is stock B's expected return? 8. Stocks A, B, and C have expected returns of 8%, 7%, and 11%, respectively. If you invest $2,000, $4,000, and $1,000 in the three stocks, respectively, what is your portfolio's expected return? 9. Stock A has a return standard deviation of .54 and stock B has a return standard deviation of .37. If their returns have a correlation of .10, what is the standard deviation of a portfolio containing 40% stock A and 60% stock B? 10. That part of the risk of a stock which cannot be eliminated. It is not caused by events that are unique to a particular firm 11. As diversification increases, the total variance of a portfolio approaches ____________. A. 0 B. 1 C. the variance of the market portfolio D. infinity E. none of the above 12. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is A. unique risk. B. beta. C. standard deviation of returns. D. variance of returns. E. none of the above. 13. The riskfree rate and the expected market rate of return are 0.06 and 0.12, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal to. A. 0.06. B. 0.144. C. 0.12. D. 0.132. E. 0.18. Chapter 9 Overview Debt financing is an important source of funds for businesses. Firms borrow from commercial banks and also sell their debt publicly on capital markets. This chapter explores two major topics: the valuation of bonds and other debt instruments, and the determinants of interest rates. Debt can be obtained in private financial markets and on public exchanges. There is a wide variety of debt instruments, differing in terms of maturity, seniority, ratings, special provisions, and interest payments. The value of any debt instrument is the present value of its future cash flows. For most bonds, future cash flows consist of the maturity value and, in the case of coupon bonds, periodic interest payments. There are four key relationships in bond valuation: 1) the value of a bond is inversely related to changes in the yieldtomaturity; 2) changes in interest rates over time affect the current value of a bond; 3) as the maturity date approaches, the market value of a bond approaches its par value; and 4) longterm bonds have greater interest rate risk than shortterm bonds. A variety of factors affect interest rates. First, the real rate of interest and the level of inflation are determinants of interest rates. Second, interest rates are affected by the risk of default. Third, the term to maturity is a key factor affecting interest rates. Key terms Basis point Bond rating Call provision Collateral Conversion feature Convertible bond Corporate bond Coupon interest rate Credit spread Current yield Defaultrisk premium Discount bond Fisher effect Floating rate Floating rate bonds Inflation premium Interest rate risk Skills Yield to Maturity (YTM) Expected Yield to Maturity Present Value of Bond with annual payments Present Value of Bond with semiannual payments Real rate of interest Junk (highyield) bond LIBOR Liquidityrisk premium Maturityrisk premium Mortgage bond Nominal (or quoted) interest rate Par or face value of a bond Private market transaction Premium bond Real rate of interest Spread to Treasury bonds Syndicate Term structure of interest rates Transaction loan Yield curve Yield to maturity Zero coupon bond Nominal rate of interest Problems 1. If an 8% coupon bond is trading for $1025.00, it has a current yield of ____________ percent. 2. If investors receive 8% interest rate per year on their bank deposits, what real interest rate will they earn if the inflation rate over the year is 5%. 3. If the real interest rate is 6% and expected inflation is 2%, what is the nominal interest rate? 4. A coupon bond that pays interest of $100 annually has a par value of $1,000, matures in 5 years, and is selling today at a $72 discount from par value. The yield to maturity on this bond is __________. 5. A 10year, 5% coupon bond with a par value of $1,000 and semiannual payments sells at a yield tomaturity of 8%. What is its price? 6. A 30year maturity bond with face value of $1,000 makes annual coupon payments and has coupon rate of 10%. What is the bond price if the yield to maturity is 8%? 7. An inverted yield curve means that a. Short term rates are higher than long term rates b. Long term rates are higher than short term rates c. Short term loans are less risky d. Long term loans are more risky 8. If a coupon bond is selling at a discount then it must be the case that a. Yield to maturity is greater than the coupon rate b. The yield to maturity is less than the coupon rate c. the face value of the bond is less than the price of the bond d. A and C e. None of the above 9. A corporate bond has a lower yield than a government bond a. T b. F 10. Imagine that your company issues bonds when market interest rates imply a yield to maturity of 7%. Suppose then that interest rates in the market decrease so the yield to maturity on new bonds is 4%. What can you say about the price of the old bonds a. The price increased b. The price decreased c. The price only depends on the coupon rate which did not change d. The price only depends on the face value which did not change e. C and D Chapter 10 Overview Common stock represents ownership of the corporation. The characteristics of common stock include that it is permanenti.e., it has no maturity date; its dividends are not set but can vary; common stockholders have voting rights; and the claim of stockholders on the firm's assets is junior to other stakeholders. There are several ways in which the value of common stock can be determined. One approach is the Discounted Dividend Model. Using this approach, common stock is valued by discounting the dividend stream that the firm is expected to pay to its shareholders. Alternative methods of common stock valuation involve a comparables approach. One such model is the P/E Ratio Valuation Model. Preferred stock is a hybrid security that shares some of the features of bonds and common stock. For preferred stock, the dividend is fixed and owners of this type of security have no voting rights. Claims on the firm's assets for preferred stockholders are junior to debt securities but senior to common stock. Since the dividend for preferred stock can be viewed as a perpetuity, valuation of preferred stock is found by finding the present value of this constant dividend stream. Key Terms Block holding Block trade Constant dividend growth rate model Cumulative preferred stock Cumulative voting Initial public offering Majority voting Market's required yield Proxy Claim on Income Claim on Assets Voting Rights Agency Cost Features of Preferred Stock Skills Discount Dividend Model Calculate the growth rate P/E Ratio Valuation Model Value of Preferred Stock Problems 1. 2. 3. 4. What variables drive share value? What are the key factors that affect an investor's required rate of return? What are the key determinants of a firm's growth opportunities? What is the value of a share of common stock that paid $6 dividend at the end of last year and is expected to pay a cash dividend every year from now to infinity, with that dividend growing at a rate of 5 percent per year, if the investor's required rate of return is 12% on that stock? 5. Burrito Corp. has a dividend yield of 6%. If its dividend is expected to grow at a constant rate of 3%, what must be the expected rate of return on the company's stock