Assignment: Please help me understand the formulas and the setup. Spread sheet in Excel will be helpful too (when applicable).
Question 1: BioMax Inc. offers an 8 percent coupon bond that has a $1,000 par value, semiannual coupon payments and 20 years of its original 25 years left to maturity. Which of the following statements is true if the market return on similar bonds is 10%?
a. The bond will sell at a premium of $1,198 because the coupon rate is greater than the market interest rate.
b. The bond will sell at a discount of $828 because the coupon rate is greater than the market interest rate.
c. The bond will sell at a premium of $1,198 because the coupon rate is less than market interest rate.
d. The bond will sell at a discount of $828 because the coupon rate is less than the market interest rate.
Question 2: Aquaman stock has exhibited a standard deviation in returns of 0.7, whereas Green Lantern stock has exhibited a standard deviation of 0.8. The correlation coefficient between the stock returns is 0.1. What is the standard deviation of a portfolio composed of 70% Aquaman and 30% Green Lantern?
a. 0.75000
b. 0.32122
c. 0.61743
d. 0.56676
Question 3: The stocks of Microsoft and Apple have a correlation coefficient of 0.6. The variance of Microsoft stock is 0.4 and the variance of Apple stock is 0.3. What is the covariance between the two stocks?
a. 0.21
b. 0.07
c. 0.72
d. 0.36
Question 4: Star Solutions, Inc. paid a dividend last year of $3.55, which is expected to grow at a constant rate of 3%. Star Solutions has a beta of 1.8 and their stock is currently selling for $31.47. If the market interest rate is 9% and the risk-free rate is 4%, would you purchase Star Solutions' stock?
a. No, because it is overvalued $5.10 c. No, because it is overvalued $9.85
b. Yes, because it is undervalued $5.10 d. Yes, because it is undervalued $9.85