Question

Suppose a 30-year bond is selling for $1276.76. with a rate of return of 6% What is its coupon payment?

3- suppose that the market risk premium is 6%. What is the stock risk premium knowing that beta equals to 0.90. 4-Assume that the beta of Apple stocks is 0.99 and Facebook is 1.2. knowing that the risk free rate for treasury bill is 3%. And the expected market return is 5%. Calculate the expected return for a portfolio invested 40% in Apple?

Answer 1

2. The coupon payment needs to be found using PMT function in EXCEL

=PMT(rate,nper,pv,fv,type)

rate=6%

nper=number of periods=30

pv=1276.76

fv=1000

=PMT(6%,30,-1276.76,1000,0)

PMT=80.01

The annual coupon payment=$80.01 (coupon rate=80.01/1000=8.01%)

3. The stock risk premium=beta*market risk premium=0.9*6%=5.4%

4. Expected return on Apple=risk free rate+(beta*(market return-risk free rate))=3%+(0.99*(5%-3%))=4.98%

Expected retrun on Facebook=3%+((1.2*(5%-3%))=5.4%

weight of Apple in the portfolio=40%, the n Facebook's weight will become 60%

Expected return on portfolio=(weight of Apple*expected return on Apple)+(weight of Facebook*expected return on Facebook)

=(40%*4.98%)+(60%*5.4%)

=5.23%