Question 1

The Johnsons are putting away funds for their sons college tuition. Their Brad has just celebrated his 10^th birthday, and he should be starting college eight years from now. The tuition and fees at the school he anticipates attending are currently $14,500 a year. The familys financial advisor believes that the current tuition can be expected to increase at a rate of 3.5% per year. Brads parents anticipate that he will finish his undergrad studies in four years. Brads tuition and fees will have to be paid at the start of each school year starting 8 years from now.

Brads parents have saved $15,000 so far toward Brads college fund. They intend to contribute an additional $5,000 each year for the next 4 years,(that would be years 1,2,3,4),and then in years five, six, and seven they intend to make three equal annual contributions. The account theyve establish for their goal pays interest at a rate of 9%. How much must the payments made in years five, six, and seven be in order to ensure that Brad has enough for his college tuition?

Question 2

The following stocks are in a portfolio managed by you. The portfolio has a total of three million dollars in stocks. The market has a required return of 11.00% and the return on US Treasury Bills is 5.00% What is the required rate of return on this portfolio?

Stock Amount Beta

W $1,075,000 1.20

X 675,000 0.50

Y 750,000 1.40

Z 500,000 0.75

$3,000,000

Question 3

A bond with a term of 25 years pays an annual coupon rate of 8.5% annually. It is now 2020. The current price of the bond is $925. If the YTM remains as it is now for the next five years, what will the price of the bond be in 2025?

Question 4

A current bond issue has a selling price of $1,250. The annual coupon rate is 9% annually. The issue has a 25 year term with a $1,000 face value. This bond has a five year callable feature which would result in a $50 call premium. What is the difference between the bond's YTM and its YTC?