FIN 311_Exam Review 3_F22

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Northern Arizona University *

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311

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Finance

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Feb 20, 2024

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FIN 311 Exam Review Assignment #3 – Fall 2022 Names ___Colleen Mathias____________ 1. [6 points] A 12-year, $1,000 par value bond has 8 years left to maturity and its coupon rate is 8%, with interest paid semi-annually. Answer the following questions for this bond. a. If the required return on this bond (the current market rate for similar bonds) is 6%, will this bond sell for a premium or a discount (no calculations are needed)? i. Premium b. What is the bond’s current price if the market rate (required return) is 4.5%? i. Coupon= ( .08*1000)/2= 40 (pmt) ii. Number of periods= 8*2=16 iii. Rate= 4.5/2= 2.25 iv. Fv=1000 v. Pv=1232.97 c. If the bond is currently quoted at (selling for) $939.50 in the market, what is the Yield to Maturity? i. Pmt = 40 ii. Periods= 16 iii. Fv= 1000 iv. Pv=-939.5 v. I= 4.54 * 2= 9.08 2. [10 points] You own a stock that you are considering selling. The current dividend is $1.30/share. Your required return for this stock is 8%. The current market price of the stock is $22.50. Consider each of the following situations separately. a. If the dividend is fixed (preferred stock), what is the value of the stock? Should you sell it? i. 1.30/ .08 = 16.25 ii. Yes because it is above 16.25 and it will go down to 16.25 b. If the dividend grows at 3% indefinitely, what is the value of the stock? Should you sell it? i. [1.30(1+.03)]/(.08-.03) = 26.78 ii. No because the price will rise to meet 26.78
c. If the dividend grows at 6% per year for each of the first two years and then 3% indefinitely, what is the value of the stock? Should you sell it? i. D1= 1.30(1+.06) = 1.378= FV pv=1.28 ii. D2= 1.378(1.06)= 1.46068=fv pv=1.25 iii. P2= [1.46068( 1.03)]/( .08-.03)= 30.090008=fv pv=25.797 iv. PMT=0 i%= 8% v. $28.33 is the value 3. [6 points] You are considering purchasing Coca-Cola stock but would like to know more information about risk and returns before you make the purchase. Next year’s possible returns for Coca-Cola and their probabilities of occurring are listed in the table below. Probabilities Possible Returns 20% 3% 55% 8% 25% 12% Calculate: a. The expected return for Coca-Cola. i. .20 * .03= .006 ii. .55*.08=.044 iii. .25*.12=.03 iv. .006+.044+.03=.08 b. The standard deviation for Coca-Cola. i. ( .03 .08 ) 2 .20 + ( .08 .08 ) 2 .55 + ( .12 .08 ) 2 .25 ii. 3% c. The coefficient of variation for Coca-Cola. i. Standard deviation/ mean = .03/,08= 37.5%
4. [6 points] You are just getting started with investing and considering making some investments in Mutual Funds or Exchange-Traded Funds. You have been given the following ticker symbols for funds that are available to you through your retirement plan. a. Look up the expense ratios, load fees (if any), and 10-year performance returns for each of the listed funds. 10-year performance can be found in the Performance tab, and Load Fees can be found in the Price tab. Fund Expense Ratio Load Fees 10-year Performance AGTHX AMCPX TWEIX SCHB b. If you can only pick one of these funds to invest your money in, which is the better choice and why? Keep in mind that the 10-year returns are not net of fees (meaning fees are not yet deducted when returns are calculated). 5. [2 points] Determine an average age for your team (or use your age if working individually) and calculate the percentage of your portfolio that should be invested in stocks or similar high-risk investments. Age: 20 100-20= 80% should be invested in stocks
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