Some exercises mix of short answer and MCQ
do in class
1.Supposethatallinvestorsexpectthatinterestratesforthe
4yearswillbeasfollows:
Whatisthepriceof3yearzerocouponbondwithapar
valueof$1,000?
1000/(1.10)^3 is WRONG
1000/(1.05)(1.07)(1.09)
^compounding
fo

ch 16 answers to ch 16 assign 1
5. The required return is 9 percent. k
$1.22 (1.05)
0.05 .09 9%
$32.03
6. The Gordon DDM uses the dividend for period (t + 1), which would be 1.05.
$35
$1.05
r .08 8%
(k .05)
7. The PVGO is $.56:
PVGO $41
$3.64
$0.56

Pension Plan
2Million dollar payments/year
YTM All bonds 16%
Duration of 5 year bonds is 4 years
Coupon 12%
Duration of 20 year bonds is 11 years
Coupon 6%
Present Value of the obligation
PV = 2(cash flow)/ .16 (interest rate) = 12.5M (PV = CF/r)
Duration

1.
2.
3.
Arbitrage Pricing Theory (APT) Assumptions
There are sufficient # of securities to diversity away idiosyncratic
risk
The return on securities is a function of K different risk factors
No arbitrage opportunties
APT & Well-Diversified Portfolios
rp

CAPM EXERCISE - Ta ken from ch. 7 in the text. CAPM
Are the following scenarios valid? Why or why not?
Portfolio
A
B
Expected
return
.20
.25
Beta
1.4
1.2
Higher beta and lower return so no
A Er should be higher than b
Portfolio
A
B
Expected return Standar

Ch 6 exercises for review
12 Suppose that there are many stocks in the market and that the characteristics of stocks A and B are as
follows:
Suppose that it is possible to borrow at the risk-free rate, rf. What must be the value of the risk-free rate?
(Hi

aSSIGNMENT CH 7 -16
16. In problems 1719, assume that the risk-free rate of interest is 6 percent and the expected rate of return on
the market is 16 percent.
17. A share of stock sells for $50 today. It will pay a dividend of $6 per share at the end of t