1. An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matu

Question

1. An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 9.6%.Bond C pays a 10% annual coupon, while Bond Z is a zero coupon bond.

a. What is the Expected Return?

b. The Risk

c. What is the Coefficient of Variation?

2. Task Oriental Corporation's bonds make an annual coupon interest payment of 7.35%. The bonds have a par value of $1,000, a current price of $1,130, and mature in 12 years.

a. What is the current yield:

b. What is the yield to maturity on these bonds?

c. A customer is requesting an 8% return on the bonds what is the intrinsic value measured in $?

d. What would you recommend to the customer?

3. Assuming a risk free rate of of 2.8% a market average return of 7.0% and a beta measure of 0.88

What is the required rate of return, and the risk premium? What does the rate of return mean, and what does the risk premium mean?

4. Likert Company%u2019s last dividend paid by was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%.

a. What is the best estimate of the current stock price?

b. Suppose later today you learnt that the stock was being sold in the capital market for $40 would you recommend a buy, sell or hold? Why? State your reasons in terms of intrinsic value

5. Carbello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share.

a. What is the expected rate of return on the stock?

b. What is its Effective Annual (not nominal) rate of return?

c. If a customer is requesting an 2% return per quarter would you recommend that they buy the stock?

Explanation / Answer

3) reqd rate of return(k) = rfr + beta( expected market rate - rfr + risk premium)
risk premium of country = (market rate - risk free rate) * std deviation ratio

risk prem = 7 - 2.8 = 4.2% (std dev = 1)

reqd rate of retrn on equity(k) = 2.8 + 0.88( 7 - 2.8 + 4.2)

reqd rate of return = 2.8 + 7.39 = 10.19%

4) g1 = 1.5%

D0 = $1.55

k= 12%

after two years D2 = D0(1 + g1)^2 = 1.55 (1 + 0.015)^2 = 1.55(1.03) = $1.596 = $1.60

now from now on div. growth rate . = g2 = 8%

so , by dividend discount model, estimated stock price = D2/(k - g2) = 1.60/(12% - 8%) = $40

estimated stock price = $40

now if it sells for $40 in market, i would recommend hold becaus its neither undervalued nor overvalued... once if it it rises on market sentiments or good performance.. you are recommended to buy more... and then if you feel its reaching its peak, as in say some $ 60 , its becoming excessively overvalued there you are recommended to sell...

5) expected rate of return = 1/55 = 0.018 = 1.8%

annual rate of return = 7.2%

no we cannot recommend this stock to the person whose expecting 2% per quarter return

1) total expected return = (9.6% *4 + 10% *4 +0)/3 = 26.13 %

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