1. You invest $10,000 in a 7.25%, 30-year bond at a price of $95.
a) What is the duration of the bond?
b) What is the gain or loss on your investment if its yield increases by 50 basis points?
2. The Growth Fund has an expected return of 15% and a standard deviation of 20%. The Income Fund has an expected return of 10% and a standard deviation of 12%.
The correlation between the two funds is 0.
a) What is the expected return of the minimum risk portfolio constructed from the Growth & Income funds?
b) What is your expected return if you invest 40% of your money into the risk free rate at 5%and the remaining 60% in the minimum risk portfolio?
3. You plan to buy yourself a brand new car to celebrate your graduation. The car costs $50,000. You can buy it from the dealer for $47,000, or at least.
The terms of the lease call for a down payment of $5,000 and a payment of $850 per month for 60 months. The car (if leased) may be purchase at the end of 60 months for $3,000. Would you but the car or lease it if you can borrow or lend at an interest rate of 6% per year? Ignore all tax effects.
4. Amax Inc. has a PE ratio of 25. It is expected to earn $1.50/ share in year 1. If investors expect a return of 15% per year on the stock, what is the premium for growth on the stock?
5. A mutual fund earned 10% over the last year and 15% per year over the last 2 years (all returns are geometric averages). If you invested $10,000 per year in the fund in each of the last 2 years.
a. How much would your investments be worth today?
b. What is your average return (IRR)