Exercise
You bought a 20-year bond paying 8 percent
interest today. Your required rate of return is
10 percent. Right after you bought it the
interest rate changes so the your required
rate changes to 12 percent.
What is your dollar gains or losses?
What is your percentage gain of losses ?
Face value = $1,000
You bought a 15-year bond paying 10 percent
interest. The yield to maturity of this bond is 12
percent. Right after you bought the bond
interest rate changes causing you to reinvest
your coupon payments at 14 percent per year.
This rate stays the same over the next four
years. After four years you sell your bond.
What is your total dollar gain or losses in this
transaction?
What is your annualized rate of return in this
investment?
Face value = $1000
Risk free rate is 6 percent the return on TASI is
12 percent. The stock has a beta of 1.4.
What is the rate of return implied by CAMP?
Plot the SML in a risk-return space.
XYZ firm just paid $3 per share in dividend.
This dividend is expected to grow by 7 percent per
year forever. Risk free rate is 4 percent and return on
TASI is 10 percent. XYZ stock carries a beta of 1.5.
a. What is the maximum price you pay for each share
of XYZ?
b. What is the expected price in year 2?
Suppose you bought 1000- shares of this stock at a
price equal to the price found in “a” above. After one
year and after you collect the dividend you sell your
shares at $58. What is your annual rate of return?
ABC company just paid a dividend per share of
$2. This dividend is going to increase by 6
percent per year forever. ABC stock is selling at
$26.5. Risk free rate is 4 percent and the return
on a market index is 11 percent. The Beta of
ABC is 1.2.
Is this stock under priced or over priced based
on CAPM model? By how much? Plot the
information in risk-return space.
How much the price should go up or down to
reaches the equilibrium price suggested by
CAPM?