Question

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 risk-free 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 2-year 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 risk-free rate is 7%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

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% (semi-annual)

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 2-year rate, (1 + 2-year rate)^2 = (1 + 2%)^2 x (1 + 2%) x (1 + 3%) = 1.1146

=> 2-year 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%