Question;Question 29. Suppose the term structure of;risk-free interest rates is as shown below;1 year;2 years;3 years;5 years;7 years;10 years;20 years;Rate (EAR, %);1.99;2.41;2.74;3.32;3.76;4.13;4.93;a.;Calculate;the present value of an investment that pays $1000 in two years and $2000 in;five years for certain.;b.;Calculate;the present value of receiving $500 per year, with certainty, at the end of the;next five years. To find the rates for the missing years in the table, linearly;interpolate between the years for which you do know the rates. (For example;the rate in year 4 would be the average of the rate in year 3 and year 5.);c.;Calculate;the present value of receiving $2300 per year, with certainty, for the next 20;years. Infer rates for the missing years using linear interpolation. (Hint;Use a spreadsheet.);Question 31: What is the;shape of the yield curve given the term structure in Problem 29? What;expectations are investors likely to have about future interest rates?;Answer;Question 2: Assume that a bond will make payments;every six months as shown on the following timeline (using six-month periods);a. What;is the maturity of the bond (in years)?;b. What;is the coupon rate (in percent)?;c. What;is the face value?;Question 6: Suppose a 10-year, $1000 bond with an;8% coupon rate and semiannual coupons is trading for a price of $1034.74.;a. What;is the bond?s yield to maturity (expressed as an APR with semiannual;compounding)?;b. If;the bond?s yield to maturity changes to 9% APR, what will the bond?s price be?;Question 7.;Suppose a five-year, $1000 bond with annual coupons has a price of $900;and a yield to maturity of 6%. What is the bond?s coupon rate?;Question 10.;Suppose a seven-year, $1000 bond with an 8% coupon rate and semiannual;coupons is trading with a yield to maturity of 6.75%.;a. Is;this bond currently trading at a discount, at par, or at a premium? Explain.;b. If;the yield to maturity of the bond rises to 7% (APR with semiannual;compounding), what price will the bond trade for?;Question28. The following table summarizes the;yields to maturity on several one-year, zero-coupon securities;Security;Yield (%);Treasury;3.1;AAA corporate;3.2;BBB corporate;4.2;B corporate;4.9;a. What;is the price (expressed as a percentage of the face value) of a one-year;zero-coupon corporate bond with a AAA rating?;b. What;is the credit spread on AAA-rated corporate bonds?;c. What;is the credit spread on B-rated corporate bonds?;d. How;does the credit spread change with the bond rating? Why?;Question 30. HMK Enterprises;would like to raise $10 million to invest in capital expenditures. The company;plans to issue five-year bonds with a face value of $1000 and a coupon rate of;6.5% (annual payments). The following table summarizes the yield to maturity;for five-year (annual-pay) coupon corporate bonds of various ratings;Rating;AAA;AA;A;BBB;BB;YTM;6.20%;6.30%;6.50%;6.90%;7.50%;a.;Assuming;the bonds will be rated AA, what will the price of the bonds be?;b.;How much total;principal amount of these bonds must HMK issue to raise $10 million today;assuming the bonds are AA rated? (Because HMK cannot issue a fraction of a;bond, assume that all fractions are rounded to the nearest whole number.);c.;What must;the rating of the bonds be for them to sell at par?;d.;Suppose;that when the bonds are issued, the price of each bond is $959.54. What is the;likely rating of the bonds? Are they junk bonds?;Question 1. The figure below shows the one-year;return distribution for RCS stock.;Calculate;a. The;expected return.;b. The standard;deviation of the return.;Question 30. What does the beta of a stock measure?;Question 35. Suppose the market risk premium is 5% and the;risk-free interest rate is 4%. Using the data in Table 10.6, calculate the;expected return of investing in;TABLE 10.6 Betas;with Respect to the S&P 500 for Individual Stocks (based on monthly data;for 2007?2012);Company;Ticker;Industry;Equity Beta;General Mills;GIS;Packaged Foods;0.20;Consolidated Edison;ED;Utilities;0.28;The Hershey Company;HSY;Packaged Foods;0.28;Abbott Laboratories;ABT;Pharmaceuticals;0.31;Newmont Mining;NEM;Gold;0.32;Wal-Mart Stores;WMT;Superstores;0.35;Clorox;CLX;Household Products;0.39;Kroger;KR;Food Retail;0.42;Altria Group;MO;Tobacco;0.43;Amgen;AMGN;Biotechnology;0.44;McDonald?s;MCD;Procter & Gamble;PG;Household Products;0.47;Pepsico;PEP;Soft Drinks;0.51;Coca-Cola;KO;Soft Drinks;0.54;Johnson & Johnson;JNJ;Pharmaceuticals;0.59;PetSmart;PETM;Specialty Stores;0.75;Molson Coors Brewing;TAP;Brewers;0.78;Nike;NKE;Footwear;0.91;Microsoft;MSFT;Systems Software;1.01;Southwest Airlines;LUV;Airlines;1.09;Intel;INTC;Semiconductors;1.09;Whole Foods Market;WFM;Food Retail;1.10;Foot Locker;FL;Apparel Retail;1.11;Oracle;ORCL;Systems Software;1.12;Amazon.com;AMZN;Internet Retail;1.13;Google;GOOG;Internet Software and Services;1.14;Starbucks;SBUX;Restaurants;1.20;Walt Disney;DIS;Movies and Entertainment;1.21;Cisco Systems;CSCO;Communications Equipment;1.23;Apple;AAPL;Computer Hardware;1.26;PulteGroup;PHM;Homebuilding;1.28;Dell;DELL;Computer Hardware;1.41;salesforce.com;CRM;Application Software;1.47;Marriott International;MAR;Hotels and Resorts;1.48;eBay;EBAY;Internet Software and Services;1.48;Coach;COH;Apparel and Luxury Goods;1.60;Macy?s;M;Juniper Networks;JNPR;Communications Equipment;1.71;Williams-Sonoma;WSM;Home Furnishing Retail;1.72;Tiffany & Co.;TIF;Apparel and Luxury Goods;1.80;Caterpillar;CAT;Construction Machinery;1.85;Ethan Allen Interiors;ETH;Home Furnishings;1.95;Autodesk;ADSK;Application Software;2.14;Harley-Davidson;HOG;Motorcycle Manufacturers;2.23;Advanced Micro Devices;AMD;Semiconductors;2.24;Ford Motor;F;Automobile Manufacturers;2.38;Sotheby?s;BID;Auction Services;2.39;Wynn Resorts Ltd.;WYNN;Casinos and Gaming;2.41;United States Steel;X;Steel;2.52;Saks;SKS;Department Stores;2.57;Source: CapitalIQ;a.;Starbucks? stock.;b.;Hershey?s stock.;c.;Autodesk?s stock.;Question 37. Suppose the market risk premium is 6.5% and;the risk-free interest rate is 5%. Calculate the cost of capital of investing;in a project with a beta of 1.2.;Question 2. You own three stocks: 600 shares of;Apple Computer, 10,000 shares of Cisco Systems, and 5000 shares of;Colgate-Palmolive. The current share prices and expected returns of Apple;Cisco, and Colgate-Palmolive are, respectively, $500, $20, $100 and 12%, 10%;8%.;Answer;a. What;are the portfolio weights of the three stocks in your portfolio?;b. What;is the expected return of your portfolio?;c. Suppose;the price of Apple stock goes up by $25, Cisco rises by $5, and;Colgate-Palmolive falls by $13. What are the new portfolio weights?;d. Assuming;the stocks? expected returns remain the same, what is the expected return of;the portfolio at the new prices?
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