Question

11. A zero coupon bond is selling for $476. The bond has a face value of $1,000 and matures in 8 years. Your friend asks you if he should buy the bond. He tells you his required return is 9 percent. Would you recommend he buy the bond or not? Explain your answer. 12. Assume that you have $330.000 invested in a stock that is retuming 11.50%, $170,000 invested in a stock that is returning 22.75%, and $470,000 invested in a stock that is returning 10.25%. The risk free rate is 2.1% and inflation is 5%. What is the expected return of your portfolio? A) 15.6% B) 12.9% C) 18.3%. D) 14.8% 13. Miller's preferred stock is selling at $54 on the market and pays an annual dividend of $4.20 per share. a. What is the expected rate of return on the stock? b. If an investor's required rate of return is 9%, what is the value of the stock to that investor? c. Considering the investor's required rate of return, does this stock seem to be a desirable investment? 14. Over the last 5 years, the average nominal rate of return of 90 day Treasury bills was 1.02%, Saltine Co.'s average nominal stock retum was 8.9%, large company stocks average nominal return was 15%, and the inflation rate averaged 2.7%. The real rate of Saltine's stock return is A) 6.8%. B) 6.0% C) 5.1%. D) 4.3%

Answer 1

Dear student, only one question is allowed at a time. I am answering the first question

11)

A zero coupon bond pays only the maturity value and no interest is paid in between. A buyer of a zero coupon bond has to calculate whether the present value of the amount receivable from the bond at required rate of return is more or less than the current price

If the present value is more than the current market price, the bond is attractive as it is selling below its worth and should be bought but if the present value if less than the current market price, it means the bond is not able to give the required rate of return of the investor and should not be bought

Present value factor

= 1 / ( 1 + Required rate of return) ^ Number of years to maturity

= 1 / ( 1.09 ^ 8)

= 1 / 1.992563

= 0.501866

So, the price of the bond should be

= Face value x PV Factor

= $1,000 x 0.501866

= $501.87

As the price of the bond in the market is $476 which is less than the present value of the bond of $501.87, the bond should be purchased