The rate of interest on Federal government debt borrowed in 2020 is 2.75%. If you borrow...

The rate of interest on Federal government debt borrowed in 2020 is 2.75%. If you borrow $14,618 by the time you graduate and rates stay the same, what will be your monthly payment if you want to pay it off in 8 years?

A stock has a beta of 1.34. The risk free rate is 1.101% and the market risk premium is 5%. What is the fair return on the stock? Answer as a percent. Use at least 2 decimal places in your response. Enter only numbers and decimals.

Expert Solution

Calculate monthly payment on debt
Monthly payment	Present value/((1-(1+r)^-n))/r

r	0.23%	2.75%/12
n	96	8*12
Calculate monthly payment
Monthly payment	14618/(1-(1.0023)^-96)/0.0023
Monthly payment	14618/86.08546
Monthly payment	$169.81

Thus, monthly payment on loan would be $169.81

Calculate fair return on stock using CAPM formula

Return on stock	Risk free rate + Beta*Market risk premium
Return on stock	1.101%+(1.34*5%)
Return on stock	1.101% + 6.7%
Return on stock	7.80%

Thus, fair return on stock is 7.80%

jeff jeffy answered 2 years ago

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