1: Return on Financial Assets - Assignment Example

3. One year ago, you bought a bond for $10,000. You received interest of $400 at the end of the year, as well as your $10,000 principal. If the inflation rate over the last year was five percent, calculate the real return. Show your work. The $10,000 bond generated $400 in coupon payments in a one year span. The coupon rate can be defined as the interest rate stated on a bond (Investorwords, 2011) The return of the bond is 4% (400/10000). Due to the fact that the inflation rate for the year was 5% the investor must calculate the real return on investment.

The formula to calculate real return on investment is illustrated below:10000 * 5% = 500(400-500) / 10000 = -100/10000 = -1%.The real return of the bond during the last year was -1%. 4. Suppose that the price of a stock is $50 at the beginning of a year and $53 at the end of the year, and it pays a dividend of $2 during the year. Calculate the stock’s current yield, capital-gains yield, and the return. Show your work for three separate calculations. a) Current yield2 / 50 = 4%b) Capital-gains yield(53 -50) / 50 = 6%c) Return(2 + 3) / 50 = 5 / 50 = 10%5.

Use the capital-asset pricing model to predict the returns next year of the following stocks, if you expect the return to holding stocks to be 12 percent on average, and the interest rate on three-month T-bills will be two percent. Calculate a stock with a beta of -0.3, 0.7, and 1.6. Show your work for three separate calculations.a) beta 0.3Ra = Rf + B (Rm – Rf) (Besley & Brigham, 2000, pg. 392Ra = .02 + 0.3 (.12 - .02) = .05b) beta 0.7Ra = .02 + 0.7 (.12 - .02) = .09c) beta 1.6Ra = .02 + 1.6 (.12 - .02) = .18The expected returns of the 0.3, 0.7, 1.

6 beta scenarios is 5%, 9%, and 18% respectively (Moneychimp).ReferencesBesley, S., Brigham, E. (2000). Essential of Managerial Finance (12th ed.). Fort Worth: The Dryden Press. Investorwords.com (2011). Coupon rate. Retrieved October 24, 2011 from http://www.investorwords.com/1174/coupon_rate.html Moneychip.com. CAPM (Calculator). Retrieved October 24, 2011 from http://www.moneychimp.com/articles/valuation/capm.htm