Question 2
Thatcher Corporation's bonds will mature in 12 years. The bonds have a face value of $1,000 and a 7% coupon rate, paid semiannually. The price of the bonds is $1,100. The bonds are callable in 6 years at a call price of $1,060. What is their yield to maturity? What is their yield to call?
Question 3
The real riskfree rate of interest is 3%. Inflation is expected to be 2% this year and 3% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2year Treasury securities?
Question 4
As an equity analyst you are concerned with what will happen to the required return to Universal Toddler' stock as market conditions change. Suppose r_{RF} = 3%, r_{M} = 13%, and b_{UT} = 1.9.
a. Under current conditions, what is r_{UT}, the
required rate of return on UT Stock? Round your answer to two
decimal places.
b. Now suppose r_{RF} (1) increases to 4% or (2) decreases to 2%. The slope of the SML remains constant. How would this affect r_{M} and r_{UT}?
c. Now assume r_{RF} remains at 3% but r_{M} (1) increases to 15% or (2) falls to 12%. The slope of the SML does not remain constant. How would these changes affect r_{UT}?
Question 5
Suppose you manage a $4.655 million fund that consists of four stocks with the following investments:
Stock 
Investment 
Beta 

A 
$460,000 
1.50 

B 
425,000 
0.50 

C 
1,420,000 
1.25 

D 
2,350,000 
0.75 
If the market's required rate of return is 11% and the riskfree rate is 7%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.
2) YTM and YTC can be calculated using I/Y function
N = 12 x 2 = 24, PMT = 7% x 1000 / 2 = 35, PV = 1,100, FV = 1,000
=> Compute I/Y = 2.91% (semiannual)
Annualized YTM = 2.91% x 2 = 5.83%
Similarly for YTC,
N = 6 x 2 = 12, PMT= 35, PV = 1,100, FV = 1,060 => Compute I/Y = 2.92%
YTC = 2.92% x 2 = 5.85%
3) Using expectation theory,
(1 + nominal yield) = (1 + real rate) x (1 + inflation)
For 2year rate, (1 + 2year rate)^2 = (1 + 2%)^2 x (1 + 2%) x (1 + 3%) = 1.1146
=> 2year rate = 5.57%
5) Weighted average beta = (1.5 x 460,000  0.5 x 425,000 + 1.25 x 1,420,000 + 0.75 x 2,350,000) / 4,655,000
beta = 0.86
Using CAPM, required rate = Rf + beta x (Rm  Rf)
= 7% + 0.86 x (11%  7%)
= 10.45%
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