Question

​AT&T issued a​ 20-year bond on January​ 1, 2007 with a coupon rate of​ 4% and a face value of​ $1,000. It is now January​ 1, 2020 and the bond matures on January​ 1, 2027. What is the value of one​ AT&T bond to an investor with a required return of​ 11%?

A.

​$748

B.

​$792

C.

​$670

D.

​$708

Calculate the required rate of return for Mercury​ Inc., assuming that the risk free rate of return is​ 2%, the expected market return is 11​ percent, Mercury has a beta of​ 2.0, and​ Mercury's realized rate of return has averaged 14 percent over the last 5 years.

A.

​18%

B.

​19%

C.

​20%

D.

​17%

Answer 1

Given about ​AT&T bond,

Face value = $1000

coupon rate = 4%

=> annual coupon = 4% of 1000 = $40

years to maturity = 7 years

required return = 11%

price of the bond can be solved on financial calculator using following values:

FV = 1000

PMT = 40

N = 7

I/Y = 11

compute for PV, we get PV = -670

So current price of the bond = $670.

Option C is correct.

2).Risk free rate Rf = 2%

Expected market return Rm = 11%

beta of mercury stock = 2

Assuming CAPM, required return on stock Mercury is Rf + beta*(Rm - Rf )

=> Required return = 2 + 2*(11-2) = 20%

Option C is correct.