Colton Lane Charlson

September 15, 2014

Managerial Finance
Assignment 3
Problem 5-29
a) PV = (C1/1+r2) ^2+(C1/1+r5) ^5
PV = 1,000/(1 + 0.0241)^2 + (2,000/(1 + 0.0332)^5= $2,652.15
b) r4 = (2.74 + 3.32)/2= 3.03
PV = 500/(1 + 0.0199)^1 + 500/(1 + 0.0241)^2 + 500/(1 + 0.0274)^3 +500/(1 +
0.0303)^4+500/(1 + 0.0332)^5 = $2,296.43
c)
Term
Year

Rate (EAR, %)

EAR + 1

PV

1.99

1.0199

2,255.12

2.41

1.0241

2,193.02

2.74

1.0274

2,120.85

3.03

1.0303

2,041.14

3.32

1.0332

1,953.47

3.54

1.0354

1,866.72

3.76

1.0376

1,776.31

3.88

1.0388

1,695.75

4.01

1.0401

1,615.02

10

4.13

1.0413

1,534.51

11

4.21

1.0421

1,461.25

12

4.29

1.0429

1,389.36

13

4.37

1.0437

1,319.00

14

4.45

1.0445

1,250.29

15

4.53

1.0453

1,183.35

16

4.61

1.0461

1,118.30

17

4.69

1.0469

1,055.21

18

4.77

1.0477

994.18

19

4.85

1.0485

935.25

20

4.93

1.0493

878.49

$ 30,636.56

Colton Lane Charlson

September 15, 2014
Managerial Finance
Assignment 3
Term
Year

Rate (EAR, %)

EAR + 1

PV

1.99

=B2%+1

=((2300)/(C2^A2))

2.41

=B3%+1

=((2300)/(C3^A3))

2.74

=B4%+1

=((2300)/(C4^A4))

=(B6+B4)/2

=B5%+1

=((2300)/(C5^A5))

3.32

=B6%+1

=((2300)/(C6^A6))

=(B8+B6)/2

=B7%+1

=((2300)/(C7^A7))

3.76

=B8%+1

=((2300)/(C8^A8))

=((2/3)*B8)+((1/3)*B11)

=B9%+1

=((2300)/(C9^A9))

=((1/3)*B8)+((2/3)*B11)

=B10%+1

=((2300)/(C10^A10))

10

4.13

=B11%+1

=((2300)/(C11^A11))

11

=((9/10)*$B$11)+((1/10)*$B$21)

=B12%+1

=((2300)/(C12^A12))

12

=((8/10)*$B$11)+((2/10)*$B$21)

=B13%+1

=((2300)/(C13^A13))

13

=((7/10)*$B$11)+((3/10)*$B$21)

=B14%+1

=((2300)/(C14^A14))

14

=((6/10)*$B$11)+((4/10)*$B$21)

=B15%+1

=((2300)/(C15^A15))

15

=((5/10)*$B$11)+((5/10)*$B$21)

=B16%+1

=((2300)/(C16^A16))

16

=((4/10)*$B$11)+((6/10)*$B$21)

=B17%+1

=((2300)/(C17^A17))

17

=((3/10)*$B$11)+((7/10)*$B$21)

=B18%+1

=((2300)/(C18^A18))

18

=((2/10)*$B$11)+((8/10)*$B$21)

=B19%+1

=((2300)/(C19^A19))

19

=((1/10)*$B$11)+((9/10)*$B$21)

=B20%+1

=((2300)/(C20^A20))

20

4.93

=B21%+1

=((2300)/(C21^A21))
=SUM(D2:D21)

Problem 5-31
The yield curve is increasing. This essentially means that investors expect interest rates to rise in
the future.
Problem 6-2
a) (6 months * 20 payments = 120 payments) 120 months/12 = 10 years.
The maturity is 10 years
b) 20/1,000*2 = 4%
The coupon rate is 4%
c) The face value is $1,000
Problem 6-6
a) PV = 1,034.74
FV = 1,000
Periods = 20 = (10 years x 2 times a year)
PMT = (1,000 x 0.8)/2 = 40
Rate = 40/(1+(YTM/2))+40/(1+(YTM/2))^2.(40+1000)/(1+(YTM/2))^20= 7.5%

Colton Lane Charlson

September 15, 2014
Managerial Finance
Assignment 3
b) FV = 1,000
Rate = 9%
Periods = 20 = (10 years x 2 times a year)
PMT = (1,000 x 0.8)/2 = 40
PV = 40/(1+(.09/2))+40/(1+(.09/2))^2.(40+1000)/(1+(.09/2))^20=$934.96
Problem 6-7
PV = -900
FV = 1,000
Rate = 6%
Periods = 5
900=C/(1 + .06/2)+C/(1+.06/2)^2.(C + 1000)/(1+.06)^5=36.26
Coupon rate is 3.626%
Problem 6-10
a) The bond is trading at a premium because the yield to maturity is less than the coupon
rate.
b) 40/(1+.035)+40/(1+.035)^2+40+1000/(1+.035)^14 = $1,054.60
Problem 6-28
a) P = 100/(1 + .032) = 96.899
b) The credit spread on AAA-rated corporate bonds is 0.032 0.031 = 0.1%.
c) The credit spread on B-rated corporate bonds is 0.049 0.031 = 1.8%.
d) The credit spread increases as the bond rating falls. This happens because lower rated
bonds are riskier.
Problem 6-30
a) FV = 1,000
Rate = 6.3%
Periods = 5
PMT = (1,000 x 0.065) = 65
PV = 65 / (1 + .063) + 65 / (1 + .063)^2.(65 + 100) / (1 + .063)^5=$1,008.36
b) Each bond will raise $1008.36, so the firm must issue: 10,000,000/1,008.36 =
9,917.13 or 9,918 bonds. This will correspond to a principle amount of 9,918 x
$1,000 = $9,918,000
c) For the bonds to sell at par coupon rate = yield rate; so that means 6.5%
d) FV = 1,000
Periods = 5
PMT = (1,000 x 0.065) = 65
PV = $959.54
$959.54 = 65 / (1 + YTM) + 65 / (1 + YTM)^2.(65 + 100) / (1 + YTM)^5=7.5%

Colton Lane Charlson

September 15, 2014
Managerial Finance
Assignment 3
Problem 10-1
a) E[R] = -0.25x(0.1) 0.1x(0.2) + 0.1x(0.25) + 0.25x(0.3) = .055 = 5.5%
b) Variance[R] = (-0.25 0.055)^2 x 0.1 + (-0.1 0.055)^2 x 0.2 + (0.1 0.055)^2 x 0.25 +
(0.25 0.055)^2 x 0.3 = 2.6%
Standard Deviation = square root of (0.026) = 16.13%
Problem 10-30
The beta of a stock measures the amount of systemic risk in the particular stock.
Problem 10-35
a) 4%+1.04 5% = 9.2%
b) 4% + 0.19 5% = 4.95%
c) 4% + 2.31 5% = 15.55%
Problem 10-37
Cost of Capital = Risk-Free Interest Rate + I x (market risk premium) = 5+1.2(6.5) = 12.8%
Problem 11-2
a)
Stock
Apple
Cisco
Colgate
Totals
b)
Stock
Apple
Cisco
Colgate

c)
Stock
Apple
Cisco
Colgate
Totals

Shares
600
1,000
5,000

Share Price
500
20
100

Total Value
300,000
200,000
500,000
1,000,000

Expected Return
12%
10%
8%

Weight
30%
20%
50%

Portfolio Return
3.6%
2%
4%
9.6%

Shares
600
1,000
5,000

Share Price
525
25
87

Total Value
315,000
250,000
435,000
1,000,000

Weight
30%
20%
50%
100%

Weight
31.5%
25%
43.5%
100%

Colton Lane Charlson

September 15, 2014
Managerial Finance
Assignment 3
d)
Stock
Apple
Cisco
Colgate

Expected Return
12%
10%
8%

Weight
31.5%
25%
43.5%

Portfolio Return
3.78%
2.5%
3.48%
9.76%