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Financial Management Appropriate Returns

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1. (Capital asset pricing model) MFI Inc. has a beta of .86. If the expected market return is 11.5 percent and the risk-free is 7.5 percent, which is the appropriate return of MFI (using the CAPM)?

2. (Computing bolding-period returns)
a. From the price data here, compute the holding-period returns for Jazman and Solomon for periods 2 through 4.

1 $9 $27
2 11 28
3 10 32
4 13 29

b. How would you interpret the meaning of a holding-period return?

3. (Bondholder' expected rate of return) The market price is $900 for a 10-year bond ($1,000 par value) that pays percent interest (4 percent semiannually). What is the bond's expected rate of return?

4. You own a bond that has a par value of $1,000 and matures in 5 years. It pays a 9 percent annual coupon rate. The bond currently sells for $1,200. What is the bond's expected rate of return?

5. (Bond valuation) ExxonMobil 20-year bonds pay 9 percent interest annually on a $1,000 par value. If bonds sell at $945, what is the bond's expected rate of return?

6. (Bondholders' expected rate of return) Zenith Co.'s bonds mature in 12 years and pay 7 percent interest annually. If you purchase the bonds for $1,150 what is your expected rate of return?

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Given that,
Beta for MFI, β=0.86
Expected market return, Rm=11.5%
Risk Free Rate, Rf=7.5%

Hence, using CAPM:
Appropriate return of MFI=7.5%+(11.5%-7.5%)*0.86=10.94%

We have,
Given that,
1 $9 $27
2 11 28
3 10 32
4 13 29

Jazman Holding Period Return=($13-$9)/$9=44.44%
Solomon Holding Period ...

Solution provided by:
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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