Question

. Question 6 What is the duration of a 4 year coupon bond with a face value of $1000, a coupon rate of 8% and interest rate is 10%? A. 3.12 B. 3.89 C. 3.56 D. 3.48 Question 7 What is the amount of the annual coupon payment for a bond that has 8 years until maturity, sells for $1,150, and has a yield to maturity of 9.37%? A. 121.17 B. 130.18 C. 108.63 D. 104.97 Question 8 In a year in which common stocks offered an average return of 18% and Treasury bills offered 7%. The risk premium for common stocks was: A. 11% B. 18% C. 3% D. 1% Question 9 An upward shaped Treasury yield curve indicates: A. yields on Treasuries with longer maturities will continue to rise B. all bonds should be selling at a discount rather than premium C. real interest rates will be increasing soon in response to economic recession D. bonds will not return as much as common stocks in a boom

According to the Capital Asset Pricing Model (CAPM), if the expected return on stock ABC is greater than the expected return on stock XYZ then:

	A.	The beta of stock ABC is greater than the beta of stock XYZ
	B.	The beta of stock ABC is less than the beta of stock XYZ
	C.	Not enough information provided
	D.	The standard deviation of stock ABC is greater than the standard deviation of stock XYZ

Answer 1

6.)

Duration of Bond is calculated as follows

= SIGMA[PV of Cashflow(n) * n]/Price

[n being period, PV calculated at Interest Rate (not coupon rate)]

SIGMA [PV of Cashflow (n) *n] is calculated as follows

Duration is 3.34, Closest is 3.48

7.) YTM is the yield if the bond is held till maturity.

8.)

A 90 day T-Bill is usually considered Risk Free Rate of the Market, but in this case, lets assume it is for an year.

Risk Free = 7%

Market Return (Common Stocks) = 18%

Risk Premium = Market Return - Risk Free Rate = 18% - 7% = 11%

9.)

Yes, Upward sloping (Shaped) Yield curve indicates that longer maturities of the securities are yielding higher returns. As Yield curve is usually drawn with maturity on X-Axis and Return on Y-Axis.

So. A

10.)

The expected Return in CAPM Model is

Return = Risk Free Rate + Beta X Market Risk Premium

So, Risk free rate and Market Risk Premium for both stocks is same. Which implies that if Return of ABC is higher than the return of XYZ, then Beta of ABC is higher than Beta of XYZ.

Good Luck