Please view the attached file and quote me a price, taking into consideration that I am a returning and continuing customer who has done a lot of business with your company over the past two years.Problem Assignment One

 

Please help me with the following problems by providing your solutions in the space given below each question. You may adjust the space as needed if it becomes necessary.

 

4-7: Calculate the price of a 5-year, $1,000 par value bond that makes semiannual payments, has  a coupon rate of 8%, and offers a yield to maturity of 7%. Then recalculate the price of this bond assuming a yield to maturity of 9%. What is the relationship between the prices you have calculated and the bond’s par value? Explain.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4-10: Two bonds offer a 5% coupon rate, paid annually, and sell at par ($1,000). One bond matures in two years and the other matures in ten years.

 

What are the yields to maturities on each bond?

 

 

 

 

 

 

 

 

 

If the yield to maturity changes to 4%, then what happens to the price of each bond?

 

 

 

 

 

 

What happens if the yield to maturity changes to 6%?

 

 

 

 

 

4-24: Zenith Propulsion, Inc. is expected to pay a dividend next year of $2.45 per share. Investors think that Zenith will continue to increase its dividend by 5% each year for the foreseeable future.  

 

If the required rate of return on Zenith stocks is 13%, then what is Zenith’s stock price? 

 

 

 

 

 

Investors expect Zenith to pay out 50% of its earnings as dividends. What is Zenith’s price/earnings ratio? (The price/earnings ratio is defined as the current price divided by next year’s earnings).

 

 

 

 

 

 

Maintaining all assumptions, recalculate Zenith’s stock price and price/earnings ratio if investors expect dividends to grow at 8% per year rather than at 5%. 

 

 

 

 

 

 

 

4-27: On September 22, 2010 Wireless Logic Corporation (WLC) paid its annual dividend of $1.25 per share. Because WLC’s financial prospects are good, investors believe that the company will increase its dividend by 20% per year for the next four years. After that, WLC is expected to increase the dividend at a more modest annual rate of 4%. Investors require a 16% return on WLC stock, and WLC always makes its dividend payment on September 22 of each year.  

 

What is the price of WLC stock on September 23, 2010?

 

 

 

 

 

 

 

 

 

What is the price of WLC stock on September 23, 2011?

 

 

 

 

 

 

 

 

 

 

Calculate the percentage change in price of WLC stock from September 23, 2010 to September 23, 2011.

 

 

 

 

 

 

For an investor who purchased WLC stock on September 23, 2010, received a dividend on September 22, 2011, and sold the stock on September 23, 2011, what was the total rate of return on the investment? How much of this return came from the dividend, and how much came from the capital gain?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5-6: A risk-averse investor owns a stock portfolio worth $1 million. The investor believes that over the next year this portfolio’s value will either rise by 20% or fall by 10%, with each outcome being equally likely. An investment bank offers the investor the following proposition: One year from today, the bank will pay the investor $100,000 if her portfolio value has decreased; otherwise, she receives nothing. In return, the investor must pay the investment bank $50,000 today. Should the investor accept the deal?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5-12: Using the following probability distribution, determine the mean, variance, and standard deviation of all four securities.

 

Probability           Security A           Security B                 Security C                Security D 

15%                       8%                       -1.88%                       1.94%                       3%                                          

35%                       5%                       -4.28%                       3.14%                       3% 

20%                       -4%                      -11.48%                    6.74%                       3%

30%                       -6%                      -13.08%                    7.54%                       3%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compute the correlation coefficient between Security A and Security B; Security A and Security C; Security A and Security D. 

 

 

 

 

 

 

 

 

 

Which security is the risk-free security? Explain using the previous statistical measures.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Because Security B has all negative returns, can one simply assume it is perfectly negatively correlated with Security A?

 

 

 

 

 

 

 

 

 

 

Should the correlation between the risk-free security and any risky security be zero?

 

 

 

 

 

 

 

 

 

 

 

 

 

6-1: Security X has an expected return of 8% with an associated standard deviation of 28%. Security Y has an expected return of 10% with an associated standard deviation of 36%. Assuming a covariance of exactly -0.023732 find the portfolio’s expected return and standard deviation for the following portfolios. Also, which portfolio seems to be the minimum variance portfolio? 

 

Weight of X          Weight of Y

      20%                        80% 

      40%                        60%

      60%                        40%  

      80%                        20%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6-7: If the market has an expected return of 13% and a standard deviation of 28% and if the risk-free rate is 5%, explain how you can construct a portfolio with an expected return of 20%. What will be the standard deviation of this portfolio?