Carl buys a 7-year, $10,000 par value, 7% coupon bond. Exactly 4 years after purchasing the bond, he needs cash so he wants to sell the bond. If due to changes in the interest rate environment, the same bond would today only have a 6% coupon, what would be the fair price of the bond?

 

 

Jessica buys a 5-year, $1,000 par value, 4% coupon bond. Exactly 3 years after purchasing the bond, she notices that the price of her bond increased to $1,057.44. What must be the prevailing interest rate now for an equivalent bond?

 

 

Clay Jensen is evaluating whether to purchase one of 2 different stocks and is considering the investment in isolation (he has no other investments). Clay believes stock A has equal probabilities of returning 6%, -10%, or 22%. He believes stock B has equal probabilities of returning 9%, -20%, or 35%. The risk-free rate is 4%. What is the appropriate measure to compare these two stocks and which investment should he choose?

 

 

You are considering adding Gamma stock to your portfolio. What is the required return on the stock if it has a beta of 0.9, the risk-free rate is 3%, and the expected return on the market is 10%? If the expected return on the investment is 9%, would you add Gamma stock to your portfolio?

Answer rating: 100% (QA)

SOLUTION A To calculate the fair price of the bond we need to use the bond pricing formula which is Bond price C r x 1 1 1 r n F 1 r n where C is the annual coupon payment r is the required rate of re... View the full answer