Question 5 Asset P has a beta of 0.9. The risk-free rate of return is 8%, while the return on the S&P 500 is 14%. Asset P's required rate of return is: Question 6 A corporate bond is sold for $1,000 (par value) with a 6% coupon. Shortly thereafter interest rates in the economy (the nominal rate of interest) increases to 8% due to inflation worries. Given this scenario (all other things being equal), which of the following bond valuations for this bond in the secondary market would most likely happen: $1,000; $1.080, $1,196, or nothing given the choices? Question 7 Considering the CAPM, which of the following is most useful: 90-day T-Bill, Prime rate, company net income, or depreciation from the balance sheet? Question 8 BOND VALUATION - Ch 6 and pages OM 11-14: In 2013 Carnival Cruise Lines decided to sell some new bonds (something about fixing a big ship). They sold the bonds for $1,000 (face value) with a 20 year maturity and an 8% coupon. Two years have passed. Interest rates on similar bonds have declined to 5%. If an owner attempts to sell her/his Carnival bond bought for $1,000 in 2013, what should they expect to receive for it in the secondary market? Question 9 Continuing with question 8 above. Let's say that interest rates stayed at 8% (didn't fall to 5%) and they will stay there for at least the next 5 years. What would be the value of Carnival's bonds in 2016? Question 10 The Going to the Sun Highway in Glacier National Park - located in northwestern Montana - is one of the most spectacular drives in North America. Unfortunately the road needs to be resurfaced due to many harsh winters. The State of Montana has decided to sell state bonds to cover the needed repairs, A Montana state savings bond can be converted to $100 at maturity six years from purchase. If the state bonds are to be competitive with U.S. savings bonds, which pay 8% annual interest (compounded annually), at what price must Montana sell its bonds? (Assume no cash payments on savings bonds prior to redemption.) Hint: this IS a time value problem. Question 11 Risk & return is a classic item in finance. You would like to estimate what the return on General Electric stock could be given it's beta of 1.68. Other data you have collected: the rate of return on 90 day T-Bills is 2%, on 5 year T-Notes it 3% and on the "long bond", the 30-year T- Bond = 5.5%. The Prime is 7%, LIBOR is 6.5% and the average return on the overall stock market is estimated to be 12%. OK again, what do you expect the rate of return on G.E.'s stock to be? Hint: note that term "beta" - there's a classic formula that uses "beta"! Question 12 Looking at a list of beta coefficients you spot a number of stocks as possible buys for your new stock portfolio. You have $80,000 to invest. You have decided to have just three stocks in your portfolio (this will make it easier to follow than a portfolio of more stocks). You have selected two already: The Gap with a beta of 1.31 and Disney with a beta of 1.25. You have invested $20,000 in each. For the final selection you are looking at Ford with a beta of 2.72, ebay with a beta of 1.75, IBM with a beta of 0.68 and the parent of Anheuser-Busch with a beta of 1.00. You would like the overall beta of your portfolio to be as close to "the market" or "average stock" as possible.