Managerial Finance

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Chapter 5: Bonds, Bond Valuation, and Interest Rates
(5–1) Bond Valuation with Annual Payments
Jackson Corporation’s bonds have N=12 years remaining to maturity. Interest is paid annually, the bonds have a FV=$1,000 par value, and the coupon interest rate is PMT=8%. The bonds have a yield to maturity of I=9%. What is the current market price of these bonds? $928.39 Calculator solution: Input: N = 12, I = 9, PMT = 80, FV = 1000, Solve for PV = $928.39

(5–2) Yield to Maturity for Annual Payments
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? .12475 or 12.48% Calculator solution: Input N = 12, PV = -850, PMT = 100, FV = 1000, and solve for I = rd = %. Or

Yield to maturity (financial) calculator.

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Sources: http://www.moneychimp.com/calculator/bond_yield_calculator.htm |

(5–3) Current Yield for Annual Payments
Heath Foods’s bonds has 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? 8.55% Calculator solution: N=7,I/Y=8, PMT=90, fv=1000,CPT PV= 1052.06 current yield = coupon/current price

Thus, current yield=90/1052.06=8.55%
years to maturity| 7|
face value of | $1,000|
yield to maturity of | 8%|
coupon rate| 9%|

(5–6) Maturity Risk Premium
The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.3%. What is the maturity risk premium for the 2-year security? 0.3% r2| =| r*| +| IP| +| DRP| +| LP| +| MRP|

6.3%| =| 3%| +| 3%| +| 0| +| 0| +| MRP|

6.3% = 6% + MRP
MRP = 6.3 – 6
MRP = 0.3%
(5–7) Bond Valuation with Semiannual Payments
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? $1,085.80 C = 10%/2 of 1000 = 50, n =8 x 2 = 16, m = 1000, I = 8.5%/2 = 4.25% = 50 x [1-1/ (1+0.0425) 16]/0.0425 + 1000/ (1+.0425) 16

= $1,084.84
Calculator solution:
FV = 1,000| PMT = 50| N = 16| I = 8.5/2 = 4.25%| Present Value = $1,085.80|

(5–13) Yield to Maturity and Current Yield
You just purchased a bond that matures in 5 years. The bond has a face value of $1,000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What is the bond’s yield to maturity? 8.65% CURRENT YIELD| =| ANNUAL COUPON| | PV|

0.0821| =| 80| | PV|

PV = 80 0.0821 = 974.42
Calculator solution: N = 5; PMT = 80; FV=1000; PV = 974.42 CPT I/Y I/Y = 8.65%

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Chapter 6: Risk, Return, and the Capital Asset Pricing Model 6-6 Beta and expected return
If a company’s beta were to double, would its expected return double? According to the Security Market Line (SML) equation, an increase in beta will increase a company’s expected return by an amount equal to the market risk premium times the change in beta. For example, assume that the risk-free rate is 6%, and the market risk premium is 5%. If the company’s beta doubles from 0.8 to 1.6 its expected return increases from 10% to 14%. Therefore, in general, a company’s expected return will not double when its beta doubles. uwf.edu/rconstand/GEB5874/Text11th/.../solutions_nss_nc_8.doc

(6–1) Portfolio Beta
An individual has $35,000 invested in a stock with a beta of 0.8 and another $40,000 invested in a stock with a beta of 1.4. If these are the only two investments in her portfolio, what is her portfolio’s beta? Investment| Beta|

$35,000| .o8|
$40,000| 1.4|
Total $75,000| |
bp = ($35,000/$75,000)(0.8) + ($40,000/$75,000)(1.4) = 1.12

(6–2) Required Rate of...
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