Bonds pricing and expeected returns*****already a++ rated

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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