5-15 Absalom Motor’s 14% coupon rate, semi-annual payment, $1,000 par value bonds that mature

in 30 years are callable 5 years from now at a par price of $1,050. The bonds sell at a price of
$1,353.54 and the yield curve is flat. Assuming that interest rates in the economy are expected to
remain at their current level, what is the best estimate of the nominal interest rate on new bonds?

Known:

Period to call 25x2 = 50

Coupon rate 14/2 = 7%
Coupon 70
Par value 1000
Callable price 1050

By using excel, we can calculate YTC for the bond

YTC = RATE (50; 70; -1050; 1000)

YTC = 6,65%

Therefore, the yield to call for the bond is 6,65%

5-21 Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par
value, a 10% coupon rate, and semi-annual interest payment:

a. Two years after the bonds were issued, the going rate of interest on bonds such as these fell
to 6%. At what price would the bonds sell?

Known:
N = 8x2 = 16
I = 6/2 = 3%
PMT / Coupon payment = $100/2 = $50
Par value = $1,000

By using excel, we can calculate the value bond

Value bond = PV (0,03; 16; 50; 1000)
Value bond = $1,251.22

b. Suppose that, 2 years after the initial offering, the going interest rate had risen to 12%. At
what price would the bonds sell?

Known:
N = 8x2 = 16
I = 12/2 = 6%
PMT / Coupon payment = $100/2 = $50
Par value = $1,000

By using excel, we can calculate the value bond

Value bond = PV (0,06; 16; 50; 1000)
Value bond = $898.94
 c. Suppose, as in part a, that interest rates fell to 6% 2 years after the issue date. Suppose
further that the interest rate remained at 6% for the next 8 years. What would happen to
the price of the bonds over time?

Apabila I/YR turun menjadi 6% setelah 2 tahun penerbitan dan tetap selama 8 tahun
mendatang maka harga obligasi pada saat jatuh tempo akan mendekati Face value ($1,000)
dan akhirnya akan menjadi $1,000.

6-7 Suppose rRF = 9%, rM = 14%, and bi = 1.3

a. What is ri, the required rate of return on Stock i?

ri = rRF + (RPM)bi
= 9% + (rM - rRF)1.3
= 9% + (14% - 9%)1.3
= 9% + 6.5%
= 15.5%

b. Now suppose rRF (1) increases to 10% or (2) decreases to 8%. The slope of the SML remains
constant. How would this affect r M and ri
(1) If rRF increases to 10% then rM = 15% and the slope of the SML remains constant
ri = rRF + (rM - rRF)bi
= 10% + (15% - 10%)1.3
= 10% + 6.5%
= 16.5%
(2) If rRF decreases to 8% then rM = 13% and the slope of the SML remains constant
ri = rRF + (rM - rRF)bi
= 8% + (13% - 8%)1.3
= 8% + 3.9%
= 14.5%

c. Now assume rRF remains at 9% but rM (1) increases to 16% or (2) falls to 13%. The slope of the
SML does not remain constant. How would these changes affect r i
(1) If rM increases to 16% and the slope of the SML does not remains constant
ri = rRF + (rM - rRF)bi
= 9% + (16% - 9%)1.3
= 9% + 9.1%
= 18.1%
(2) If rM falls to 13% and the slope of the SML does not remains constant
ri = rRF + (rM - rRF)bi
= 9% + (13% - 9%)1.3
= 9% + 5.2%
= 14.2%

6-9 Suppose you manage a $4 million fund that consist of four stocks with the following investments

Stock Investment Beta

A 400,000 1.50
B 600,000 -0.50
 C 1,000,000 1.25
D 2,000,000 0.75

If the market’s required rate of return is 14% and the risk-free rate is 6%, what is the fund’s required
rate of return?

Portfolios Betas (bp) = w1b1 + w2b2 + w3b3 + w4b4

= (0.1)(1.5) + (0.15)(-0.5) + (0.25)(1.25) + (0.5)(0.75)

= 0.15 – 0.075 + 0.3125 + 0.375

= 0.7625

ri = rRF + (rM - rRF)bi

= 6% + (14% - 6%)0.7625
= 6% + 6.1%
= 12.1%