Finance Problem I 1) XYZ has an expected return of 10% and a standard deviation of 20%. What are the expected return and standard deviation of your investment if you buy XYZ on margin (MR = .40)? Assume your borrowing cost = 5% 2) Draw a cash flow diagram for a $1 million face value, 90-day t-bill at a discount yield of 6 percent. What is the Simple Interest Yield on the bill if held to maturity? 3) You buy a constant growth stock today for $100. It pays a dividend in year 1 of $5 and grows at 10 percent per year. Draw a cash flow diagram for the stock if you sell it at the end of year 2. What is your average return on the stock over the two years? 4) You invest in an MBS 9, 30 year with a face value of $100,000. Draw a cash flow diagram for the MBS if it survives 8 years. 5) You would like to retire at the end of 40 years with an annual pension of $1 million per year for the following 30 years. How much would you have to invest each year for the next 40 years in order to meet those withdrawals? Assume you can invest your money at 10% per year for the entire 70 year period. Problem II (Bonds) You purchase an ABC 10%, 30 Year bond with a $100 face value for 109.72 1) What is the yield to maturity of the bond? 2) What is the current yield on the bond? 3) What is the duration of the bond? 4) If you bought the bond today and sold it after 11 years, what is your cash flow yield if its yield to maturity at the end of 11 years was 11%. 5) What is your realized compound yield if you held the bond for 11 years if the reinvestment rate (R) was 11%?
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