Calculate the expected dollar profit on the stock investment.
Finance Graduate Level
1) Green Line Tours Co. bonds have 7 years remaining to
maturity. These bonds have a face (par) value of $1,000 and a yield
to maturity (YTM or Rd) of 8%. These bonds pay interest
annually and have a 9% coupon interest rate.
Calculate their current yield.
SHOW ALL WORK.
2) You read in the Wall Street Journal that 30-day US Treasury
bills are currently yielding 8.0%. Your mother-in-law, a broker at
Merrill Lynch, has given you the following estimates of current
interest rate premiums:
Inflation premium = 5.0%
Liquidity premium = 1.0%
Maturity risk premium = 2.0%
Default risk premium = 2.0%
Based on these data, the real risk free rate is:
Show all work, and discuss fully the reasons for your
What is the expected value of the gamble?
b. Would you take the sure $0.5 million or take the gamble?
c. If you choose the sure $0.5 million are you a risk taker or risk
d. Assume that you actually take the sure $0.5 million; you can
invest it in either a US Treasury bond that will return $537,500 at
the end of a year or a common stock that has a 50âˆ•50 chance of
being either worthless or worth $1,150,000 at the end of the
(1) Calculate the expected dollar profit on the stock investment.
(The expected profit on the US Treasury bond is $37,500.)
(2) Calculate the expected rate of return on the stock investment.
(The expected rate of return on the US Treasury bond is 7.5%.)
(3) Would you invest in the bond or the