EBK FOUNDATIONS OF FINANCIAL MANAGEMENT
17th Edition
ISBN: 9781260464900
Author: BLOCK
Publisher: MCGRAW-HILL LEARNING SOLN.(CC)
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Textbook Question
Chapter 6, Problem 17P
Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. Do an analysis similar to that in the right-hand portion of Table 6-6.
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Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with
maturities of two, three, and four years based on the following data. (Input your answers as a percent rounded to 2 decimal places.)
1-year T-bill at beginning of year 1
1-year T-bill at beginning of year 2
1-year T-bill at beginning of year 3
1-year T-bill at beginning of year 4
2-year security
3-year security
4-year security
Expected Return
Interest Rate
58
78
10%
128
Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with
maturities of two, three, and four years based on the following data.
Note: Input your answers as a percent rounded to 2 decimal places.
1-year T-bill at beginning of year 1
1-year T-bill at beginning of year 21
1-year T-bill at beginning of year 3
1-year T-bill at beginning of year 4
2-year security
3-year security
4-year security
Expected Return
%
%
%
Interest Rate
7%
9%
10%
12%
PLEASE ANSWER ALL THE QUESTIONS
Question 1
Fill the parts in the above table that are shaded in yellow. You will notice that there are nine line items.
Question 2
Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML)
b) Superimpose the CAPM’s required return on the SML
c) Indicate which investments will plot on, above and below the SML?
d) If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph
Question 3
From the information generated in the previous two questions;
a) Identify two investment alternatives that can be combined in a portfolio. Assume a 50-50 investment allocation in each investment alternative.
b) Compute the expected return of the portfolio thus formed.
c) Compute the portfolio’s beta. Is the portfolio aggressive or defensive?
Chapter 6 Solutions
EBK FOUNDATIONS OF FINANCIAL MANAGEMENT
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- What is the stand-alone risk? Use the scenario data to calculate the standard deviation of the bonds return for the next year.arrow_forwardUsing the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. (Input your answers as a percent rounded to 2 decimal places.) Interest Rate 1-year T-bill at beginning of year 1 1-year T-bill at beginning of year 2 1-year T-bill at beginning of year 3 1-year T-bill at beginning of year 4 2% 5% 4% 7% Expected Return 0.00 % 2-year security 3-year security % 4-year 2 decimal places required.arrow_forwardUsing the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. Note: Input your answers as a percent rounded to 2 decimal places. Interest Rate 1-year T-bill at beginning of year 1 6% 1-year T-bill at beginning of year 2 9% 1-year T-bill at beginning of year 3 10% 1-year T-bill at beginning of year 4 12% Expected Return 2 year security % 3 year security % 4 year security %arrow_forward
- Use the investment opportunity set and data shown on the excel file attached. What will be the Weight of Bonds in the Optimum Portfolio, given this investment opportunity set? Round to two decimals. for example, 0.12arrow_forwardUsing the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. (Input your answers as a percent rounded to 2 decimal places. Do not round intermediate calculations.) 1-year T-bill at beginning of year 1 1-year T-bill at beginning of year 2 1-year T-bill at beginning of year 3 1-year T-bill at beginning of year 4 2-year security 3-year security 4-year security Expected Return 6.11 % 7.10 % 5% 795 4arrow_forwardSuppose the returns on long-term corporate bonds and T-bills are normally distributed. Assume for a certain time period, long-term corporate bonds had an average return of 6.5 percent and a standard deviation of 8.5 percent. For the same period, T-bills had an average return of 3.3 percent and a standard deviation of 3.1 percent. Use the NORMDIST function in Excel to answer the following questions: a. What is the probability that in any given year, the return on long-term corporate bonds will be greater than 10 percent? Less than 0 percent? Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b. What is the probability that in any given year, the return on T-bills will be greater than 10 percent? Less than 0 percent? Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. c. In 1979, the return on long-term corporate bonds was -4.18 percent. How…arrow_forward
- All computations must be done and shown manually Question 4 Complete the following table and draw a graph showing how bond price for each bond changes over time as they move towards their maturity dates. Describe the relationship between bond prices and time remaining for maturity. Please include graph as per above information Years remaining to maturity BOND A Coupon. rate = 8% p.a. Market interest rate = 6% p.a. BOND B Coupon rate = 6% p.a. Market interest rate = 6% p.a. BOND C Coupon rate = 4% p.a. Market interest rate = 6% p.a. 10 9 8 7 6 5 4 3 2 1 0arrow_forwardAssume that you are given the following partial covariance and correlation matrices for Securities J, K and the Market. Also assume that the expected risk-free rate for the coming year is 3.0 percent and that the expected risk premium on the market is 7.0 percent. Given this information, determine the required rate of return for Security J for the coming year, using CAPM. J Market Correlation J K Market Covariance J K Market Standard Deviation O 18.48% O 20.20% O 15.48% O 12.71% O 15.04% 0.44 0.86 J 0.014400 J K 0.64 K CAN 0.016900 K 1.00 Market 0.003600 Marketarrow_forwardWhich of the following is the correct ranking of the price risk. Bond Coupon Rate Maturity (years) A 8% 5 B 6% 5 C 6% 10 A>B>C C>B>A A>C>Barrow_forward
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