C. (The security market line) The pure rate of interest is 3%, investors demand

Question

C. (The security market line) The pure rate of interest is 3%, investors demand a 5% inflation premium on long-term investments, and the risk premium for a stock with beta of 1 is 7%. ZZZ stock has a beta of 1.35.

b. Suppose investors increase their inflation premium to 6%. What is the new required rate of return from ZZZ stock?

c. Now suppose investors increase their risk premium for a stock with beta of 1 to 8% (the inflation premium is still 5%). What is the new required rate of return from ZZZ stock?

d. Now suppose investors decrease their estimate of ZZZ’s beta to 1.25 (the inflation premium is still 5%, and the risk premium is still 7%). What is the new required rate of return from ZZZ stock?

D. . (Yield-to-maturity) Proctor & Gamble has outstanding an issue of $1,000 face value, 12 5/8% coupon bonds that mature in 14 years. Calculate the bond’s yield-to-maturity if its current market price is:

a. $ 875

b. $ 950

E. (Bond price over time) General Electric Corporation has outstanding an issue of $1,000 face value, 11 3/4% coupon bonds that mature in 20 years. Today investors require a 10.5% rate of return.

a. Calculate the price of these bonds today.

b. Calculate the price of these bonds 7 years from now if market interest rates do not change.

c. Calculate the price of these bonds 14 years from now if market interest rates do not change.

d. Calculate the pric

Explanation / Answer

ANs for D

Coupon rate =12.625% per year

YTM when MV of Bond is $875

875=126.25/(1+y)+126.25/(1+y)^2+...+1126.25/(1+y)^14

YTM=14.8%

ANs for D

Coupon rate =12.625% per year

YTM when MV of Bond is $950

950=126.25/(1+y)+126.25/(1+y)^2+...+1126.25/(1+y)^14

YTM=13.5%

1/(1+YTM) Period 87% DCF 1 0.871080139 126.25 109.9738676 2 0.758780609 126.25 95.79605191 3 0.660958719 126.25 83.44603825 4 0.575748013 126.25 72.68818663 5 0.501522659 126.25 63.31723574 6 0.436866428 126.25 55.15438653 7 0.380545669 126.25 48.04389071 8 0.331485774 126.25 41.85007901 9 0.288750675 126.25 36.45477266 10 0.251524978 126.25 31.75502845 11 0.219098413 126.25 27.66117461 12 0.190852276 126.25 24.09509983 13 0.166247627 126.25 20.98876292 14 0.144815006 1126.25 163.0979007 0.67752443

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