# Essay on Principle of Finance

Words: 2980
Pages: 12

1
PART A
Question 1
Consider a bond with a 10% coupon and with yield to maturity = 8%. If the bond’s yield to maturity remains constant, then in 1 year the bond’s price will be:
a. Higher
b. Lower
c. Unchanged
d. Cannot answer based on given information
Question 2
The yield to maturity on a bond is:
a. Below the coupon rate when the bond sells at a discount, and above the coupon rate when the bond sells at a premium.
b. The discount rate that will set the present value of the payments equal to the bond price.
c. The current yield plus the average annual capital gain rate.
d. Based on the
(i) a 3-month T-bill selling at \$97,645 with par value \$100,000, or (ii) a coupon-paying bond selling at par and paying a 10% coupon semiannually. [5 MARKS]
Question 13
(a)
Suppose the rate of return on short-term government securities (perceived to be risk-free) is about
5%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model:
(i). What is the expected rate of return on the market portfolio?
(ii). What would be the expected rate of return on a stock with β = 0?
(iii). Suppose you consider buying a share of stock at \$40. The stock is expected to pay \$3 dividends next year and you expect it to sell then for \$41. The stock risk has been evaluated at β
= -.5. Is the stock overpriced or underpriced?
[15 MARKS]
(b)
B&K Enterprises will pay an annual dividend of \$2.08 a share on its common stock next year.
Last week, the company paid a dividend of \$2.00 a share. The company adheres to a constant rate of growth dividend policy. What will one share of B&K common stock be worth ten years from now if the applicable discount rate is 8%?
[5 MARKS]
(c)
Consider a bond with a coupon rate of 10%. Coupons are paid semi-annually and the bond will expire in 3 years.
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(i) Find the bond’s price today and 6 months from now after the