Task
1
What is the effect of an increase in treasury
bond to a normal company bond?
If the
interest rates of treasury bonds increase as suggested from 5% to 9% the demand
for the company common stock will decrease. This is because by interest on
treasury bonds increasing the cost of borrowing is increased as companies will
have to pay higher interest rates when issuing their own.
Task 2
What is the
yield for the three year and two year treasury security
For the 3 year
treasury bond Yr = y* + T + Mp
Mp= maturity
risk premium.
Y = Number of
years.
Yr= Yield rate
T =
average inflation for the period
r = 3 +
((2+4+4)/3) + 0
r = 6.33%
For 2 year
treasury bond Yr = y* + T + Mp
r = 3 +
((2+4)/2) + 0
r = 6%
for the 2 year
Task 3
It is not possible to construct such
a portfolio in the real world. Risk free rate is an investment with no risk of
losing money invested which can only happen with treasury bonds. Other aspects
in real life have unlimited number of risks as there are too many dynamics and
nothing is guaranteed. Because of this, an investor has to be compensated for
the risk taken through higher rates.
Task 4
Calculate the
portfolio beta
Total portfoliovalue= value of first stock + value of the second stock
Total
portfolio value = $35,000+40,000= $75,000
The
weighted better of a stock= value of a stock / total portfolio value * the
better factor
For
the first investment portfolio given,
Weighted
beta = $35,000 / $75,000 x 0.8
= 0.37
Weighted average beta for stock number 2 item
=$ 40,000 / $75,000 x 1.4 = 0.75
Portfolio
Beta = weighted beta of the first beta+
weighted better of second portfolio
= 0.37+ 0.75 =1.12 portfolio beta
= 0.37+ 0.75 =1.12 portfolio beta
Calculate the rate of return using Risk Maturity Model
Risk free rate (Rff)= 6$
Required return of the market Rmm= 13%
Beta factor (b)= 7
r = RRf + (Rmm – RRf) b
= 6% + (13/100 – 6/100)0.7
= 10.9%.
Work Cited
Brigham, Eugene F., and Joel F. Houston. Fundamentals
of financial management. Cengage Learning, 2012.
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