Problems:

EASY PROBLEMS 1-6

5-1 Bond Valuation with Annual payments
Jackson Corporations bonds have 12 years remaining to maturity.
Interest is paid annually, the bonds have a $1,000 par value, and the
coupon interest rate is 8%. The bonds have a yield to maturity of 9%.
What is the current market price of these bonds?
80*7.1607+1000*.3555 = $928

5-2 Yield to Maturity for Annual payments

Wilson Wonderss bonds have 12 years remaining to maturity. Interest
is paid annually, the bonds have a $1,000 par value, and the coupon
interest rate is 10%. The bonds sell at a price of $850. What is their
yield to maturity?
100+1000-850/12/1000+850/2 = 112.5/925 = .1216 or 12.16%

5-6 Maturity Risk Premium

The real risk-free rate is 3%, and inflation is expected to be 3% for the
next 2 years. A 2-year Treasury security yields 6.3%. What is the
maturity risk premium for the 2-year security?
6.3-3-3 = 0.3%

INTERMEDIATE PROBLEMS 7-20

5-7 Bond Valuation with Semiannual payments
Renfro Rentals has issued bonds that have a 10% coupon rate, payable
semiannually. The bonds mature in 8 years, have a face value of
$1,000, and a yield to maturity of 8.5%. What is the price of the
bonds?
50*11.44+1000*.5138 = 1086

5-13 Yield to Maturity and Current Yield

You just purchased a bond that matures in 5 years. The bond has a
face value of $1,000 and has an 8% annual coupon. The bond has a
current yield of 8.21%. What is the bonds yield to maturity?
Current price = 80/.0821 = 974
YTM = 80+1000-974/5/1000+974/2 = 85.2/987 = .0863 or 8.63%

(Brigham, Eugene F. . Financial Management: Theory & Practice, 13th

Edition. South Western Educational Publishing, 03/2010. pp. 210 - 211).
<vbk:1111894922#outline(6.21)>

Questions
 (6-6) If a companys beta were to double, would its expected
return double?

It is not necessary, for example if the risk free rate of return

is 4% and market risk premium is 6% and this point with beta
is 1, the rate of return will be 10%, but beta is 2 the rate of
return is 16% ,which shows a double beta but expected
return is just 1.6 times not doubled.

Brigham, Eugene F. . Financial Management: Theory & Practice, 13th Edition.

South Western Educational Publishing.

Problems:
EASY PROBLEMS 1-3

(6-1) Portfolio Beta

An individual has $35,000 invested in a stock with a beta of 0.8 and

another $40,000 invested in a stock with a beta of 1.4. If these are
the only two investments in her portfolio, what is her portfolios beta?

.8*35000/75000+1.4*40000/75000 = .3733+.7467 = 1.12

(6-2) Required Rate of Return

Assume that the risk-free rate is 6% and that the expected return on
the market is 13%. What is the required rate of return on a stock that
has a beta of 0.7?

6+.7*13-6= 10.9%

(6-7) Required Rate of Return

Suppose rRF = 9%, rM = 14%, and bi = 1.3.

a. What is ri, the required rate of return on Stock i?

9+1.3*14-9=15.5%

b. Now suppose rRF (1) increases to 10% or (2) decreases to 8%. The
slope of the SML remains constant. How would this affect rM and
ri?

Ri will be at 10% = 10+1.3*14-10 = 15.2%

 It has decreased by 0.3%

Ri will be at 8% = 8+1.3*14-8 = 15.8%

It has increased by 0.3%

It may be assumed that there will not be any impact on rM

c. Now assume rRF remains at 9% but rM (1) increases to 16% or (2)

falls to 13%. The slope of the SML does not remain constant. How
would these changes affect ri?

Ri will be at 16% = 9+1.3*16-9 = 18.1%

It has increased by 2.6%

Ri will be at 13% = 9+1.3*13-9 = 14.2%

It has decreased by 1.3%

Brigham, Eugene F. . Financial Management: Theory & Practice, 13th Edition.

South Western Educational Publishing.