Corporation’s bonds

5-1. Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid

annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The

bonds have a yield to maturity of 9%. What is the current market price of these bonds?

5-2. Wilson Wonders’s bonds have 12 years remaining to maturity. Interest is paid annually,

the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a

price of $850. What is their yield to maturity?

5-3. Heath Foods’s bonds have 7 years remaining to maturity. The bonds have a face value of

$1,000 and a yield to maturity of 8%. They pay interest annually and have a 9% coupon

rate. What is their current yield?

5-7. Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually.

The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%.

What is the price of the bonds?

5-8. Thatcher Corporation’s bonds will mature in 10 years. The bonds have a face value of

$1,000 and an 8% coupon rate, paid semiannually. The price of the bonds is $1,100.

The bonds are callable in 5 years at a call price of $1,050. What is their yield to maturity?

What is their yield to call?

5-11. Seven years ago, Goodwynn & Wolf Incorporated sold a 20-year bond issue with a 14%

annual coupon rate and a 9% call premium. Today, G&W called the bonds. The bonds

originally were sold at their face value of $1,000. Compute the realized rate of return for

investors who purchased the bonds when they were issued and who surrender them today

in exchange for the call price.

6-1. Your investment club has only two stocks in its portfolio. $20,000 is invested in a stock

with a beta of 0.7, and $35,000 is invested in a stock with a beta of 1.3. What is the

portfolio’s beta?

6-2. AA Industries’s stock has a beta of 0.8. The risk-free rate is 4% and the expected return on

the market is 12%. What is the required rate of return on AA’s stock?

6-3. Suppose that the risk-free rate is 5% and that the market risk premium is 7%. What is the

required return on (1) the market, (2) a stock with a beta of 1.0, and (3) a stock with a

beta of 1.7? Assume that the risk-free rate is 5% and that the market risk premium is 7%.

6-4. An analyst has modeled the stock of a company using the Fama-French three-factor

model. The risk-free rate is 5%, the market return is 10%, the return on the SMB portfolio

(rSMB) is 3.2%, and the return on the HML portfolio (rHML) is 4.8%. If ai = 0, bi = 1.2, ci =

−0.4, and di = 1.3, what is the stock’s predicted return?

6-7. Suppose rRF = 5%, rM = 10%, and rA = 12%.

a. Calculate Stock A’s beta.

b. If Stock A’s beta were 2.0, then what would be A’s new required rate of return?

6-8. As an equity analyst you are concerned with what will happen to the required return to

Universal Toddler Industries’s stock as market conditions change. Suppose rRF = 5%, rM =

12%, and bUTI = 1.4.

a. Under current conditions, what is rUTI, the required rate of return on UTI stock?

b. Now suppose rRF (1) increases to 6% or (2) decreases to 4%. The slope of the SML

remains constant. How would this affect rM and rUTI?

c. Now assume rRF remains at 5% but rM (1) increases to 14% or (2) falls to 11%. The

slope of the SML does not remain constant. How would these changes affect rUTI?

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