Question

F.E

23. In your two-stock portfolio, you invest $25 in stock A and $75 in stock B. If the beta of stock A is 1.26 and the beta of stock B is 0.6, your portfolio beta will be: Input your answer two places to the right of the decimal point as in x.xx

24.What is the price of a 6-year bond paying an annual coupon rate of 7.9%, but paying it semiannually, per face (par) value of $1,000 if the annual market rates for these bonds are 11.1%? Answer to the nearest cent, xxx.xx and enter without the dollar sign.

Answer 1

23. Value of the portfolio= $25 + $75

= $100

Weight of stock A= $25/ $100*100

= 0.25*100

= 25%

Weight of stock B= $75/ $100*100

= 0.75*100

= 75%

Portfolio beta= 0.25*1.26 + 0.75*0.6

= 0.3150 + 0.45

= 0.7650 0.77.

24.Information provided:

Par value=future value= $1,000

Time= 6 years*2= 12 semi-annual periods

Coupon rate= 7.9%/2= 3.95%

Coupon payment= 0.0395*1,000= $39.50 per semi-annual period

Yield to maturity= 11.1%/2= 5.55% per semi-annual period

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 12

PMT= 39.50

I/Y= 5.55

Press the CPT key and PV to compute the present value.

The value obtained is 862.49.

Therefore, the price of the 6 year bond is $862.49.