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I. Assume that the risk-free rate, rxo, increases but the market risk premium, (rm - nr ) declines, with the net effect being that the overall required return on the market , rm, remains constant....

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I. Assume that the risk-free rate, rxo, increases but the market risk premium, (rm - nr ) declines, with the net effect being that the overall required return on the market , rm, remains constant. Which of the following statements is CORRECT and WHY? a.) 'Ilw required return of all stocks will increase by the amount of the increase in the risk-free rate. b.) lbe required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0. c.) Since the overall return on the market stays constant, the required return on each individual stock will remain constant. The required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0. e.) -11w required return of all stocks will fall by the amount of the decline in the market risk premium.
Carrie Cautious manages a part of the University's bond portfolio. Charlie Chum, a local broker, has recommended that she buy some SUS bonds which are currently selling for $849.43 and have a 12% annual coupon and 10 years to maturity. Carrie knows that to realize the yield to maturity implied, the coupon payments must be reinvested at a rate greater than 12%. She tells Charlie she is concerned about reinvestment risk and so she will put the coupon payments in a safe boo (no into nest) until maturity. She asks him to find a bond with the same price and same maturity that could realize the same return expected without reinvesting. What will the annual coupon rate have to be on this other bond to accomplish Carrie's objectives?
3. A portion of the current yield curve has the following : 01ti = XXXXXXXXXX= .0575 „R,= .07 etc.
Your in house econometric model has forecasted that short term rates (1 year) will increase by 150 basis points a year for the next decade, i.e., in = in + .015, etc. However, investors are demanding a significant liquidity premium in the current three year rate. What is this premium? (in basis points)
4. Quesada, Inc. has a new bond issue that is selling for $1, XXXXXXXXXXThe bond has a 10% coupon (annual) and 20 years to maturity. The bond indenture provides a call feature and at the current price, the bond's yield to call is 200 basis points higher than its yield to maturity. If the bond is called, Quesada must pay the bondholder a premium of $348 (in excess of par) per bond. What is the call date for this bond, that is, how many years to call are consistent with the above data (answer in number of years)?
5. The administration is concerned about the current term structure. It is believed that the rates in the medium term are high and unless they can bring those down, business borrowing will fall and the growth of GNP will slow down. They have decided to take action through the Fed to drive these rates down. If the existing yield curve (segment) is as depicted, what future short term rate must the market believe will be present 3 years from now (in) if the 4 year spot (012,) is to be equal to the 1 year spot rate? /Assume other implied forward rates remain constant) .Ri• XXXXXXXXXX• .125 oR3= .13
6. A mutual fund manager has a $20 million portfolio with a beta XXXXXXXXXXThe risk-free rate is 4.25%, and the market risk premium is 6.00%. The manager expects to receive an additional $25 million which she plans to invest in additional stocks. After investing the additional funds, she wants the fund's required and expected return to be 13%. What must the average beta of the new stocks be to achieve the target required rate of return?
7. As the manager of the City of Gainesville bond portfolio, you have been instructed to minimize reinvestment risk. You are considering the addition of a bond with ten years to maturity to the portfolio. Several bonds of this maturity are available and have the same required return (lo XXXXXXXXXXIf the following is the price of each bond, which should you choose?
a.) $1,122.89 b.) $385.54 c.) $1,000 d.) $692.77 e.) $1,245.78
8. In spite of your best efforts to educate your dad, he still believes that what one earns from investing in a bond is the coupon rate. He therefore buys a bond with a 10% coupon (paid annually) that is selling for $1,134.20 with 10 years to maturity expecting to earn 10%.
At maturity, he shows you the results and, no surprise to him, he has realized a return of 10%! As you attempt to salvage your position, you point out to him that the only reason he was able to do this was because of the rising interest rates during the ten year holding period. In fact, you prove to him (what he already know) that the coupon payments must have been reinvested at % for this result to have occurred. a.) .10 d.) .16 b.) .12 e.) .18 c.) .14
9. Model Man has studied the financial markets at great length and has recently identifie two securities whose return series has perfect negative correlation. His model mind recalls that the combination of 2 assets in a portfolio that have perfect negative correlatiofi between their return series results in a standard deviation for the portfolio' return series of 0. So MM creates a portfolio that has 50% of the asset A (o. =.2) and 50% of Asset B (u =.3). He then calculates the portfolio's standard deviation and discovers that it is rather than 0.
What is the problem? How can he achieve his expected outcome (number solution)?
Answered Same Day Dec 31, 2021

Solution

David answered on Dec 31 2021
105 Votes
Q1. Answer : (d)
Explanation: We know that,
)
Let increase to
Revised expected return would be
If beta > 1, required return for a stock would decrease. If beta < 1, required return would increase.
Q2. Given:
Bond Price = $849.43
Time to maturity = 10 Years
Annual Coupon = 12%
Yield to maturity of the given bond is 15%. This implies that the cash flows have to be re-invested at 15%. If otherwise the cash flows are kept in a safe box, the amount equals $1200 at maturity or PMT = $120. The total amount desired received amount is thus $1200 + $1000 = $2200.
Thus, for PV = -$849.43, PMT = $0, FV = $2200, N = 10
YTM = 10%
And , for PV = -$849.43, FV = $1000, N = 10, YTM = 10%
PMT = $75.50
Which means a...
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