1. 6-1 Securities A particular security's default risk premium is 2 percent. For all securities, the inflation risk premium is 1.75 percent and the real risk-free rate is 3.5 percent. The security's liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. The security has no special covenants. Calculate the security's equilibrium rate of return.

2. 6-2 You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:

Real risk-free rate = 0.75%

Default risk premium = 1.15%

Liquidity risk premium = 0.50%

Maturity risk premium = 1.75%

a. What is the inflation premium?

b. What is the fair interest rate on Moore Corporation 30-year bonds?

3. 6-4 A 2-year Treasury security currently earns 1.94 percent. Over the next two years, the real risk-free rate is expected to be 1.00 percent per year and the inflation premium is expected to be 0.50 percent per year. Calculate the maturity risk premium on the 2-year Treasury security.

Additional problems not from textbook

4. If you buy Disney stock at $85/ share and sell it for $90/ share and they pay a $1 dividend during that month. What is the total return (expressed as a percent) in one month? What is the capital gain (expressed as a percent) if you sell it in a month?

5. In your portfolio, you own Delta Air Lines and Coca Cola Company stock in which you initially purchase ten shares of each stock at $85 and $30 respectively. At the end of a month, DAL is valued at $90 and KO is valued at $28. Assume, they don't pay a dividend. What is the initial value of the investment? What is the return (expressed as a percent) for Delta at the end of the first month? What is the return (expressed as a percent) for Coke at the end of the first month?

6. You buy Disney stock at $80/ share. It's worth $85 at the end of the first year and $90 at the end of the second year. You decide to sell it at $90. No dividend is paid, what are the two one-year returns (expressed as a percent)? What is the annualized return or geometric average (it's a percent) for the two years?

7. Calculate the weighted average growth (as a percentage) of the portfolio holding Microsoft and Nike. The total investment is $15,000. The portfolio saw 5% growth on $10,000 and 15% growth on $5,000.