Security Analysis & Portfolio Management: Name Muqaddas Zubair
Security Analysis & Portfolio Management: Name Muqaddas Zubair
Security Analysis & Portfolio Management: Name Muqaddas Zubair
Roll No# 32
Question 1
Given a required return of 6%, how much you would be willing to pay for a semi-
annual-pay bond with an 8% pa coupon rate, a $1,000 face value, and 15 years
remaining to maturity? The next coupon is due six months from now.
1- 1
(1+i)^n + FV
i (1+i)^n
40 1- 1
(1+0.03)*^30 + 1000
0.03 (1+0.03)^30
(a) You have researched other semi-annual pay bonds of similar maturity and
credit quality and determine that the appropriate yield to maturity is 5 percent.
Using this as the required rate of return, compute a fair value for this bond.
(b) Now assume that the required yield to maturity is 7%. Calculate the bond price
again.
(c) What is the relationship between bond’s price, par value and yield to maturity?
Answer
Part (a)
1- 1
(1+i)^n + FV
i (1+i)^n
30 1- 1
(1+0.025)^20 + 1000
0.025 (1+0.025)^20
Answer
30 1- 1
(1+0.035)^20 + 1000
0.035 (1+0.035)^20
30 1- 1
1.980788863 + 1000
0.035 1.980788863
The bond will sell at discount because bond price is less from is face value
(c) What is the relationship between bond’s price, par value and yield to
maturity?
A bond's price moves inversely with its YTM. An increase in YTM decreases the price and a
decrease in YTM increases the price of a bond. The relationship between a bond's price and
its YTM is convex. Percentage price change is more when discount rate goes down than
when it goes up by the same amount. The par value of a bond is the price at which the bond is sold
to investors when first issued; it is also the price at which the bond is redeemed at maturity
Question 3
Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.35 next
year. The growth rate in dividends for all three companies is 5 percent. The
required return for each company’s stock is 8 percent, 11 percent, and 14 percent,
respectively. What is the stock price for each company? What do you conclude
about the relationship between the required return and the stock price?
Answer We can use the constant dividend growth model, which is:
P t = D1/ (R – g)
As the required return increases, the stock price decreases. This is a function
of the time value of money: A higher discount rate decreases the present
value of cash flows.
Question 4
Suppose the risk-free rate is 8 percent. The expected return on the market is 16
percent. If a stock has a beta of .7, what is its expected return based on the CAPM?
Answer
Here the formula is to be determining the Expected rate of return for a risky asset
If another stock has an expected return of 24 percent, what must its beta be?
0.16 = B
0.08
E(R) = 24%
5 : Define the combination of Risk-Free Assets and Risky Portfolios on
Efficient Frontier?
Any point below A is dominated by the RFR. In fact the entire efficient frontier
below M is dominated by points in the RFR-M line(combinations obtained by
investing a part of the portfolio in the risk free asset and the remainder in M) For
example , considering points P Nd B that have the same level of risk, p dominated
the previously efficient B because it has higher return for the same level of risk
As shown, M is at the point where the ray from RFR is tangent to the efficient
frontier . The new efficient frontier thus become RFR M-F.
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