Question Security Market Line, Bond Valuation and Efficient Market Hypothesis

The expected return on DT Corporation is 15%, and its beta is 1.5. The risk - free rate is 3%, and the expected return on the market portfolio is 11%. Does the asset lie on, above, or below the Security Market Line (SML)? Explain.

You are considering the purchase of a bond with a semi - annual coupon of RM40, ten years to maturity, a face value of RM1,000, and a current market price of RM1000.

(i) At what price will be the bond sell in the market in 6 months, immediately after the first coupon payment, if the stated annual yield on the bond (in six month) is 4 percent?

(ii) if you were to buy the bond now and sell it after 6 months, what rate of return would be earned over the six - month period?

Explain efficient market hypothesis (EMH). Provide two examples of anomalies to EMH.

source: Corporate Finance First Semester Examination Academic Session 2011/2012, Universiti Sains Malaysia.