a) Rascal Corporation bonds have a 10.60% coupon and a maturity value of $1,000. The bonds, which pay interest semi-annually, will mature in 15 years.
If you require a pre-tax return of 9.5% on bonds of this risk, how much would you pay for one of these bonds after 4 years? (6 marks)
b) An investor who believes the economy is slowing down wishes to reduce the risk of her portfolio. She currently owns 12 securities, each with a market value of $3,000. The current beta of the portfolio is 1.21 and the beta of the riskiest security is 1.62.
What will the portfolio beta be if the riskiest security is replaced with a security of equal market value but a beta of 0.80?