ASSIGNMENT #2 The purpose of this assignment is to solidify your understanding on the applications of the risk and return concepts and their role in valuing financial assets. The scores of this assignment will help in assessing the following learning goal of the course: "students successfully completing this course will be able to Analyze risk return characteristics to assess valuation of financial assets". Instructions: You are required to use a financial calculator or spreadsheet (Excel) to solve 10 problems (provided on page 4) related to the risk and return, stocks and bonds valuation. You are required to show the following 3 steps for each problem (sample questions and solutions are provided for guidance) (i) Describe and interpret the assumptions related to the problem. (ii) Apply the appropriate mathematical model to solve the problem. (iii) Calculate the correct solution to the problem. Sample Questions and Solutions 7. Analysts predict that over the next year, Thete, Inc.'s common stock has a 30% chance of returning 10%, a 45% chance of returning 18%, and a 25% chance of returning 24%. What is the expected rate of return on Thete, Inc.'s common stock? Submit your answer as a percentage and round to two decimal places. 8. Analysts predict that over the next year, Thete, Inc.'s common stock has a 30% chance of returning 10%, a 45% chance of returning 18%, and a 25% chance of returning 24%. What is the standard deviation of returns on Thete, Inc.'s common stock? Submit your answer as a percentage and round to two decimal places. 9. Lastimar Inc. $1,000 par value corporate bonds were issued four years ago and have 16 years left to maturity. The bonds offer a 5% coupon rate paid semiannually and are currently selling in the market for $875. What is the bond's annual yield to maturity? Submit your answer as a percentage and round to two decimal places. 10. Consider a 14-year bond with face value $1,000 that pays a 6.6% coupon semiannually and has a yield-to-maturity of 7.2%. What is the approximate percentage change in the price of bond if interest rates in the economy are expected to increase by 0.80% per year? Submit your answer as a percentage and round to two decimal places. (Hint: What is the expected price of the bond before and after the change in interest rates?)