Problem 1:
James Smith, CFA, has developed the following data on stock X and the market:
Return on the market 10%
Covariance between the return on stock X and the return on the market 0.03
Correlation coefficient of the return on stock X and the return on the market 0.7
Standard deviation of the return on stock X 0.18
Standard deviation of the return on the market 0.20
Based on these data, what's the beta of stock x? Show your calculations
Problem 2:
Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 8.2% on these bonds. What is the bond's price? Show your calculations.
Problem 3:
A bond has a $1000 par value, 10 years to maturity, 7.5% coupon payments (annual), and currently sells for $980.
A). What's the yield to maturity (YTM)? Please show your calculations.
B). Briefly explain the business meaning of YTM, assuming that you are providing an investment seminar to an audience with little or no financial background.
C). Assuming that YTM is constant for the next 3 years, what will be the price three years from today? Please show your calculations.
Problem 4:
Find the duration of a 5% coupon bond making annual coupon payment if it has three years until maturity and a yield to maturity of 5.5%. Whats the duration if the yield to maturity is 10%? Show your calculations.
Problem 5:
Company A's 10 percent coupon rate, quarterly payment, $1,000 par value bond, which matures in 10 years, currently sells at a price of $950. The company's tax rate is 38 percent. Based on the nominal interest rate, what is the firm's cost of debt? Show your calculations.