 Uncategorized
 April 8, 2020
Financial Management I
FinancialManagement I
PartA: Moore Company
Giventhat
Couponrate = 8%
Parvalue = $1,000
Yieldto maturity for the bond = 10%
Question(a): The value of the bond if it matures at
Five years 
Ten years 
Fifteen years 
Twenty years 

Years to maturity 
5 
10 
15 
20 
Annual Coupon Rate 
4.0% 
4.0% 
4.0% 
4.0% 
Coupon PMT 
40 
40 
40 
40 
Par value 
1000 
1000 
1000 
1000 
YTM 
5.00% 
5.00% 
5.00% 
5.00% 
Price 
($922.78) 
($875.38) 
($846.28) 
($828.41) 
Fiveyears to maturity
Priceof the bond if it matures at 5 is $922.78
Tenyears to maturity
Priceof the bond if it matures at 10 is $875.38
Fifteenyears to maturity
Priceof the bond if it matures at 15 is $846.28
Twentyyears to maturity
Priceof the bond if it matures at 20 is $828.28
Question(b)
Thelonger the maturity of the bond selling at a discount, the lower theprice of the bond (Brigham,& Houston, 2012).There is always an inverse relationship that exists between the priceand maturity of the bond that are selling at discount as the abovecalculations shows.
Asthe bond moves towards its maturity, its market price is basicallygetting close to its par value which means that the bonds that has alonger maturity often fluctuates with the changes in market rate(Moyer,McGuigan, Rao, & Kretlow, 2011).
PartB: Crescent Corporation
Giventhat
Dividends= $2 per share
Continue= 4 Years
Requiredrate of return = 13%
Holdingperiod = 4 Years
Priceafter four years = $30
Presentvalue =?
Presentvalue = (13%*4*2*30)
Presentvalue = $34.35
N 
4 
I/YR 
13.00% 
PMT 
2 
FV 
30 
PV 
(24.35) 
PartC: Use of information in the provided table
Given that 

State of Economy 
Probability 
Return on A 
Return on B 
Return on C 
Boom 
0.35 
0.040 
0.210 
0.300 
Normal 
0.50 
0.040 
0.080 
0.200 
Recession 
0.15 
0.040 
0.010 
0.260 
Question(a): Calculation of the expected rate of return of each asset
Particulars 
Probability 
Return on A State 
Product 
Boom 
0.35 
0.04 
0.014 
Normal 
0.5 
0.04 
0.02 
Recession 
0.15 
0.04 
0.006 
Expected rate of return 
0.04 

Expected rate of return of asset A 
0.04 or 4% 

Particulars 
Probability 
Return on B State 
Product 
Boom 
0.35 
0.21 
0.0735 
Normal 
0.5 
0.08 
0.04 
Recession 
0.15 
0.01 
0.0015 
Expected rate of return 
0.112 

Expected rate of return of asset B 
0.112 or 11.2% 

Particulars 
Probability 
Return on C State 
Product 
Boom 
0.35 
0.3 
0.1050 
Normal 
0.5 
0.2 
0.1000 
Recession 
0.15 
0.26 
0.0390 
Expected rate of return 
0.166 

Expected rate of return of asset C 
0.166 or 16.6% 
Question(b): Calculation of the variance of each asset
State of Economy 
Pi 
Return on A 
Xp(A) 
Xp^2 
Return on B 
Xp(B) 
Xp^2 
Return on C 
Xp(C) 
Xp^2 
Boom 
0.35 
0.040 
0.014 
0.00056 
0.210 
0.0735 
0.015435 
0.300 
0.105 
0.0315 
Normal 
0.50 
0.040 
0.020 
0.00080 
0.080 
0.04 
0.0032 
0.200 
0.100 
0.0200 
Recession 
0.15 
0.040 
0.006 
0.00024 
0.010 
0.0015 
0.000015 
0.260 
0.039 
0.01014 
  
  
  
0.040 
0.00160 
  
0.112 
0.01865 
  
0.166 
0.06164 
Varianceof A
Varianceof A = 0.00160(0.04*0.04)
Varianceof A = 0
Varianceof B
Varianceof B = 0.01865(0.112*0.112)
Varianceof B = 0.000234
Varianceof C
Varianceof C = 0.06164(0.166*0.166)
Varianceof C = 0.034084
Question(c): Calculation of the Standard Deviation of each asset
Standarddeviation is given by the square root of variance
StandardDeviation of A
StandardDeviation of A = √0
StandardDeviation of A = 0
StandardDeviation of B
StandardDeviation of B = √0.000234
StandardDeviation of B = 0.015295
StandardDeviation of C
StandardDeviation of C = √0.034084
StandardDeviation of C = 0.184619
References
Brigham,E. F., & Houston, J. F. (2012). Fundamentalsof financial management.Cengage
Learning.
Moyer,R. C., McGuigan, J. R., Rao, R. P., & Kretlow, W. J.(2011). Contemporaryfinancial
management.Nelson Education.