Group ______________________
Instructions: Read each question carefully and then write down the answers in DETAIL. For problem-solving questions, please write down formulas, explanations, and numbers step by step. Solutions with the single last answer only will NOT be credited. Homework must be submitted via Blackboard before due date.

Using the CAPM to solve for Question 1-2.

1. (10 points) A Corporation's stock had a required return of 11.75% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then assume this year the market risk premium rises by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return?

2. (15 points) Assume portfolio A and portfolio B are both well-diversified portfolios. Portfolio A has an expected return of 12% and a beta of 1. Portfolio B has an expected return of 16.5% and a beta of 1.5. What must be the risk-free rate?

3. (25 Points) Pick one company you’re interested in (DO NOT PICK “MICROSOFT”) and then go to FINRA (http://finra-markets.morningstar.com/MarketData/Default.jsp) to locate the corporate bond information of your company. Find the following information of your corporate bonds (you can copy/paste from the web, or take a screenshot for graphs)
a. (10 points) Download all currently traded corporate bonds of your company. (Note that some companies may have many active trading bonds and they are shown on multiple pages on FINRA. Please include all of them.)
b. (5 points) Explain what a callable bond is, and in which condition a company will call back its issued bonds.
c. (5 points) What are the coupon rate and yield to maturity of a bond? Explain how maturity and yield would affect bond prices, respectively.
d. (5 points) What are the sources of corporate bond risks? Based on the rating information