**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:

a. 0.0%

b. 1.0%

c. 2.0%

d. 3.0%

e. 4.0%

Show all work, and discuss fully the reasons for your

choice.

What is the expected value of the gamble?

b. Would you take the sure $0.5 million or take the gamble?

Why?

c. If you choose the sure $0.5 million are you a risk taker or risk

averter?

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

year.

(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

stock? Why?

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