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Answer:
1) Cost of equity is 12.501%
2) Price of bond is $935.82
3) Price of semi-annual bond is $934.96
Explanation:
1) Given:
Beta = 1.1
Risk free rate (Rf) = 3.25%
Market risk premium (Rp) = 8.41%
Using CAPM to compute cost of equity:
Re = Rf + β (Rp)
= 3.25 + 1.1(8.41)
= 12.501%
2) Price of bond is present value of bond.
Face value (FV) = $1,000
Maturity (nper) = 10 years
Coupon rate = 8%
Coupon payment (PMT) = 0.08× 1000 = $80
Discount rate (rate) = 9% or 0.09
Using spreadsheet function =PV(rate,nper,pmt,FV)
Price of bond is $935.82. It is negative as it's cash outflow
3) Price of semi-annual bond is present value of bond.
Face value (FV) = $1,000
Maturity (nper) = 10×2 = 20 periods
Coupon rate = 8% ÷ 2 = 4%
Coupon payment (PMT) = 0.04× 1000 = $40
Discount rate (rate) = 9% ÷ 2 = 4.5% or 0.045
Using spreadsheet function =PV(rate,nper,pmt,FV)
Price of semi-annual bond is $934.96
Bond measurement is the determination of the fair value of a bond. As with any major investment or investment, a fair theoretical value of a bond is the present value of the cash flow that you are expected to produce.
What is the formula of Bond Valuation?
It is basically the calculation of the present value of possible future cash flows, which includes coupon payments and the amount of par, which is the amount of redemption at maturity. The interest rate used to reduce future cash flows is known as yield to maturity (YTM.)
[tex]\rm\,Bond\,Price = C \times \dfrac{1- (1 + r)^{-n} }{r}+ \dfrac{ F }{(1 + r)^{n} }\\[/tex]
With the help of the given information,
By using the formula of CAPM, the cost of equity is equal to:
Beta is 1.10
Risk-free rate is 3.25%
Market-risk premium is 8.41%
[tex]\rm\,Expected\,return\,on\,a\,security = Risk\,free\,rate + Beta \,of\,the\,security\times Market\,risk\,premium\\\\\\= 3.25 + 1.10\times8.41\\\\= 12.501\%[/tex]
The expected return on the security is 12.501%.
By applying the formula for price of a bond, when the coupon payments are made yearly:
Coupon payment(C) is 8% of 1,000 is $80
Interest rate is 9%
Face value is $1,000
Number of years is 10 years
[tex]\rm\,Bond\,Price = 80 \times \dfrac{1- (1 + 0.09)^{-10} }{0.09}+ \dfrac{ 1,000 }{(1 + 0.09)^{10} }\\\\\\= \$\,935.82[/tex]
It gives a negative value as it shows the outflow of cash outflow. Hence, the price of the bond is $935.82
The price of the semi-annual bond:
Coupon payment(C) is 8% of 1,000 is $80 divided by 2 is $40
Interest rate is 9%, divided by 2 is 4.5%
Face value is $1,000
Number of years is 10 years is multiplied by 2 is 20 periods.
Hence, by applying the formula of price of a bond, the price of the semi-annual bond is equal to $ 934.96.
To learn more about Bond valuation, refer to the link:
https://brainly.com/question/25596583
