Question details

BONDS PRICING AND EXPEECTED RETURNS
$ 10.00
5-1. Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid
 
annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The
 
bonds have a yield to maturity of 9%. What is the current market price of these bonds?
 
5-2. Wilson Wonders’s bonds have 12 years remaining to maturity. Interest is paid annually,
 
the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a
 
price of $850. What is their yield to maturity?
 
5-3. Heath Foods’s bonds have 7 years remaining to maturity. The bonds have a face value of
 
$1,000 and a yield to maturity of 8%. They pay interest annually and have a 9% coupon
 
rate. What is their current yield?
 
5-7. Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually.
 
The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%.
 
What is the price of the bonds?
 
5-8. Thatcher Corporation’s bonds will mature in 10 years. The bonds have a face value of
 
$1,000 and an 8% coupon rate, paid semiannually. The price of the bonds is $1,100.
 
The bonds are callable in 5 years at a call price of $1,050. What is their yield to maturity?
 
What is their yield to call?
5-11. Seven years ago, Goodwynn & Wolf Incorporated sold a 20-year bond issue with a 14%
 
annual coupon rate and a 9% call premium. Today, G&W called the bonds. The bonds
 
originally were sold at their face value of $1,000. Compute the realized rate of return for
 
investors who purchased the bonds when they were issued and who surrender them today
 
in exchange for the call price.
 
6-1. Your investment club has only two stocks in its portfolio. $20,000 is invested in a stock
 
with a beta of 0.7, and $35,000 is invested in a stock with a beta of 1.3. What is the
 
portfolio’s beta?
 
6-2. AA Industries’s stock has a beta of 0.8. The risk-free rate is 4% and the expected return on
 
the market is 12%. What is the required rate of return on AA’s stock?
 
6-3. Suppose that the risk-free rate is 5% and that the market risk premium is 7%. What is the
 
required return on (1) the market, (2) a stock with a beta of 1.0, and (3) a stock with a
 
beta of 1.7? Assume that the risk-free rate is 5% and that the market risk premium is 7%.
 
6-4. An analyst has modeled the stock of a company using the Fama-French three-factor
 
model. The risk-free rate is 5%, the market return is 10%, the return on the SMB portfolio
 
(rSMB) is 3.2%, and the return on the HML portfolio (rHML) is 4.8%. If ai = 0, bi = 1.2, ci =
 
−0.4, and di = 1.3, what is the stock’s predicted return?
 
6-7. Suppose rRF = 5%, rM = 10%, and rA = 12%.
 
a. Calculate Stock A’s beta.
 
b. If Stock A’s beta were 2.0, then what would be A’s new required rate of return?
 
6-8. As an equity analyst you are concerned with what will happen to the required return to
 
Universal Toddler Industries’s stock as market conditions change. Suppose rRF = 5%, rM =
 
12%, and bUTI = 1.4.
 
a. Under current conditions, what is rUTI, the required rate of return on UTI stock?
 
b. Now suppose rRF (1) increases to 6% or (2) decreases to 4%. The slope of the SML
 
remains constant. How would this affect rM and rUTI?
 
c. Now assume rRF remains at 5% but rM (1) increases to 14% or (2) falls to 11%. The
 
slope of the SML does not remain constant. How would these changes affect rUTI?
 
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