Sadie Pauley

Problems (Mod 4)

7-6) An investor has two bonds in her portfolio, Bond C and Bond Z. each bond matures in
4 years, has a face value of $1,000, and has a yield to maturity of 8.2%. Bond C pays a
11.5% annual coupon, while Bond Z is a zero coupon bond.

A. Assuming that the yield to maturity of each bond remains at 8.2% over the next 4
years, calculate the price of the bonds at each of the following years to maturity:

C1 C2 + Cn P
Bond
= + ... +
Price
(1+Y)2 + (1+Y)n (1+Y)n
(1+Y)1

(Spaulding).

C = 11.5 & 0
n = number of years
y = 8.2
p = 1000

Bond Value (zero coupon) = F/ (1+r)^t

F= 1,000
R= 8.2
T = time to maturity

Years to Maturity Bond C Bond Z

4 1,108.82 729.61
3 1,084.74 789.44
2 1,058.69 854.17
1 1,030.50 924.21
0 1,000.00 1,000.00

b. Plot the time path of prices for each bond.

1,200.00
1,108.82 1,084.74 1,058.69
1,000.00 1,030.50 1,000.00
924.21
Bond Value

800.00 854.17
729.61 789.44
600.00
400.00
200.00
0.00
4 3 2 1 0
Years to Maturity

Bond C Bond Z
 Sadie Pauley
Problems (Mod 4)

7-7) An investor purchased the following 5 bonds. Each bond had a par value of $1,000 and
an 8% yield to maturity on the purchase day. Immediately after the investor purchased
them, interest rates fell and each then had a new YTM of 7%. What is the percentage
change in price for each bond after the decline in interest rates?
Bond 8% 7% Percentage Change
10-yr, 10% coup 1,134.20 1,210.71 6.75
10-yr, zero 463.19 508.35 9.75
5-yr, zero 680.58 712.99 4.76
30-yr, zero 99.38 131.37 32.19
$100 perpetuity 1125.00 1428.37 14.29

8-1) A stock’s returns have the following distribution:

Demand Probability Rate of Return
Weak 0.1 -30
Below Average 0.1 -14
Average 0.3 11
Above Average 0.3 20
Strong 0.2 45

Calculate the stocks expected return, standard deviation, and coefficient of variation.
Standard Deviation = 21.86
Coefficient of Variation = 0.04777
Expected Return = 13.9%
8-5) A stock has a required return of 9%, the risk-free rate is 4.5%, and the market risk
premium is 3%.
A. What is the stock’s beta?
RP= Rm+Rrf
RP= 3
Rrf=4.5
R=9
9%=4.5%+3%(B)
4.5=3B
B=1.5%
 Sadie Pauley
Problems (Mod 4)

B. If the market risk premium increased to 5%, what would happen to the stock’s
required rate of return? Assume that the risk-free rate and the beta remain
unchanged.

1.5(5)+4.5 = 12%.

Sources:
Spaulding, W. C. (n.d.). Bond Formulas. Retrieved September 22, 2017, from
http://thismatter.com/money/bonds/bond-formulas.htm