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77julia77 [94]
3 years ago
14

The stock in Bowie Enterprises has a beta of .87. The expected return on the market is 11.70 percent and the risk-free rate is 2

.89 percent. What is the required return on the company's stock
Business
1 answer:
Tems11 [23]3 years ago
4 0

Answer:

10.55%

Explanation:

The stock in Bowie's enterprise has a beta of 0.87

The expected return on the market is 11.70%

The risk free rate is 2.89%

Therefore, the required return on the company stock can be calculated as follows

= 2.89%+0.87(11.70%-2.89%)

= 2.89%+10.179%-2.5143%

= 2.89%+7.6647%

= 10.55%

Hence the required return on the company's stock is 10.55%

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Both Bond Bill and Bond Ted have 6.2 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 5 yea
iragen [17]

Answer:

a-1. Percentage change in the price of Bond Bill = -8.07%

a-2. Percentage change in the price of Bond Ted = -21.12%

b-1. Percentage change in the price of Bond Bill = 8.94%

b-1. Percentage change in the price of Bond Ted = 30.77%

c. See the attached excel file for the graph.

d. It tells us that the longer the term of a bond, the greater will be its interest rate risk.

Explanation:

The price of each bond can be calculated using the following excel function:

Bond price = -PV(YTM, NPER, PMT, FV) ........... (1)

Where;

a-1. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Bill?

YTM = (6.2% + 2%) / Number of semiannuals in a year = 8.2% / 2 = 4.1%

NPER = Number of semiannuals to maturity = 5 * 2 = 10

PMT = Payment = Coupon rate * Face value = (6.2% / Number of semiannuals in a year) * 1000 = (6.2% / 2) * 1000 = $31

FV = Face value = Initial price of Bond Bill = $1,000

Substituting all the values into equation (1), we have:

New price of Bond Bill = -PV(4.1%, 10, 31, 1000)

Inputting =-PV(4.1%, 10, 31, 1000) in a cell in an excel file (Note: As done in the attached excel file), we have:

New price of Bond Bill = $919.29

Percentage change in the price of Bond Bill = ((New price of Bond Bill - Initial price of Bond Bill) / Initial price of Bond Bill) * 100 = (($919.29 - $1,000) / $1,000) * 100 = -8.07%

a-2. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Ted?

YTM = (6.2% + 2%) / Number of semiannuals in a year = 8.2% / 2 = 4.1%

NPER = Number of semiannuals to maturity = 25 * 2 = 50

PMT = Payment = Coupon rate * Face value = (6.2% / Number of semiannuals in a year) * 1000 = (6.2% / 2) * 1000 = $31

FV = Face value = Initial price of Bond Ted = $1,000

Substituting all the values into equation (1), we have:

New price of Bond Ted = -PV(4.1%, 50, 31, 1000)

Inputting =-PV(4.1%, 50, 31, 1000) in a cell in an excel file (Note: As done in the attached excel file), we have:

New price of Bond Ted = $788.81

Percentage change in the price of Bond Ted = ((New price of Bond Ted - Initial price of Bond Bill Ted) / Initial price of Bond Ted) * 100 = (($788.81 - $1,000) / $1,000) * 100 = -21.12%

b-1. If rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Bond Bill be then?

YTM = (6.2% - 2%) / Number of semiannuals in a year = 4.2% / 2 = 2.1%

NPER = Number of semiannuals to maturity = 5 * 2 = 10

PMT = Payment = Coupon rate * Face value = (6.2% / Number of semiannuals in a year) * 1000 = (6.2% / 2) * 1000 = $31

FV = Face value = Initial price of Bond Bill = $1,000

Substituting all the values into equation (1), we have:

New price of Bond Bill = -PV(2.1%, 10, 31, 1000)

Inputting =-PV(2.1%, 10, 31, 1000) in a cell in an excel file (Note: As done in the attached excel file), we have:

New price of Bond Bill = $1,089.36

Percentage change in the price of Bond Bill = ((New price of Bond Bill - Initial price of Bond Bill) / Initial price of Bond Bill) * 100 = (($1,089.36 - $1,000) / $1,000) * 100 = 8.94%

b-2. If rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Bond Ted be then?

rate = new YTM = (6.2% - 2%) / Number of semiannuals in a year = 4.2% / 2 = 2.1%

NPER = Number of semiannuals to maturity = 25 * 2 = 50

PMT = Payment = Coupon rate * Face value = (6.2% / Number of semiannuals in a year) * 1000 = (6.2% / 2) * 1000 = $31

FV = Face value = Initial price of Bond Ted = $1,000

Substituting all the values into equation (1), we have:

New price of Bond Ted = -PV(2.1%, 50, 31, 1000)

Inputting =-PV(2.1%, 50, 31, 1000) in a cell in an excel file (Note: As done in the attached excel file), we have:

New price of Bond Ted = $1,307.73

Percentage change in the price of Bond Ted = ((New price of Bond Ted - Initial price of Bond Bill Ted) / Initial price of Bond Ted) * 100 = (($1,307.73 - $1,000) / $1,000) * 100 = 30.77%

c. Illustrate your answers by graphing bond prices versus YTM.

Note: See the attached excel file for the graph.

d. What does this problem tell you about the interest rate risk of longer-term bonds?

It tells us that the longer the term of a bond, the greater will be its interest rate risk.

Download xlsx
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