2963 Words12 Pages

Answers to Practice Questions
1. Downward sloping. This is because high coupon bonds provide a greater proportion of their cash flows in the early years. In essence, a high coupon bond is a ‘shorter’ bond than a low coupon bond of the same maturity.
2. The key here is to find a combination of these two bonds (i.e., a portfolio of bonds) that has a cash flow only at t = 6. Then, knowing the price of the portfolio and the cash flow at t = 6, we can calculate the 6-year spot rate.
We begin by specifying the cash flows of each bond and using these and their yields to calculate their current prices:
Investment Yield C1 . . . C5 C6 Price
6% bond 12% 60 . . . 60 1,060 $753.32
10% bond 8% 100 . . . 100 1,100 $1,092.46 From the*…show more content…*

5%, five-year note: 3. 10%, five-year note: d. First, we calculate the yield for each of the two bonds. For the 5% bond, this means solving for r in the following equation: r = 0.05964 = 5.964% For the 10% bond: r = 0.05937 = 5.937% The yield depends upon both the coupon payment and the spot rate at the time of the coupon payment. The 10% bond has a slightly greater proportion of its total payments coming earlier, when interest rates are low, than does the 5% bond. Thus, the yield of the 10% bond is slightly lower. e. The yield to maturity on a five-year zero coupon bond is the five-year spot rate, here 6.00%. f. First, we find the price of the five-year annuity, assuming that the annual payment is $1: Now we find the yield to maturity for this annuity: r = 0.05745 = 5.745% g. The yield on the five-year Treasury note lies between the yield on a five-year zero-coupon bond and the yield on a 5-year annuity because the cash flows of the Treasury bond lie between the cash flows of these other two financial instruments. That is, the annuity has fixed, equal payments, the zero-coupon bond has one payment at the end, and the bond’s payments are a combination of these. 7. A 6-year spot rate of 4.8 percent implies a negative forward rate: (1.0486/1.065) – 1 = –0.010 = –1.0% To make money, you could borrow $1,000 for 6 years at 4.8 percent and lend $990 for 5 years at 6 percent. The

5%, five-year note: 3. 10%, five-year note: d. First, we calculate the yield for each of the two bonds. For the 5% bond, this means solving for r in the following equation: r = 0.05964 = 5.964% For the 10% bond: r = 0.05937 = 5.937% The yield depends upon both the coupon payment and the spot rate at the time of the coupon payment. The 10% bond has a slightly greater proportion of its total payments coming earlier, when interest rates are low, than does the 5% bond. Thus, the yield of the 10% bond is slightly lower. e. The yield to maturity on a five-year zero coupon bond is the five-year spot rate, here 6.00%. f. First, we find the price of the five-year annuity, assuming that the annual payment is $1: Now we find the yield to maturity for this annuity: r = 0.05745 = 5.745% g. The yield on the five-year Treasury note lies between the yield on a five-year zero-coupon bond and the yield on a 5-year annuity because the cash flows of the Treasury bond lie between the cash flows of these other two financial instruments. That is, the annuity has fixed, equal payments, the zero-coupon bond has one payment at the end, and the bond’s payments are a combination of these. 7. A 6-year spot rate of 4.8 percent implies a negative forward rate: (1.0486/1.065) – 1 = –0.010 = –1.0% To make money, you could borrow $1,000 for 6 years at 4.8 percent and lend $990 for 5 years at 6 percent. The

Related

## A1 Syllabus FIN 423 SPRING 2015 Financial Analysis And Management Capstone 1

4552 Words | 19 Pagesreport 2 is due before beginning the class. Presentation reviews are due on Thursday 11:00pm following the presentation day. HB 2: The O.M. Scott & Sons Co.: Presentation by groups Peer review for Case 2 is due before beginning the class Week 6, Feb-23 Week 6, Feb-25 (8) Financial markets & risk, Financing decisions B- Chpt 2 & 11 & 15, H- Chpt 5 & 6, R- Chpt 12 & 13 & 15 Case report 3 is due before beginning the class.

## Risk Mitigation Using Joint Venture Agreement in the Upstream Petroleum Industry

15328 Words | 62 PagesAmerica Intervention 2.11.6 Learning Highlights Chapter 3 Data, Methodology & Modelling 3.1 Introduction 3.2 General Parameters 3.3 Field Parameters 3.4 Methodology 3.4.1 Scenario 1 (NOC & Investor) 3.4.2 Scenario 1 Monte Carlo Simulation 3.4.3 Scenario 2 (NOC, Investor and other partners) 3.4.4 Scenario 2 Monte Carlo Simulation 3.4.5 Scenario 3 (Budget Allocation) 3.4.6 Scenario 3 Monte Carlo Simulation Chapter 4 Model Results, Limitations & Discussion 4.1 Introduction

## Thesis on Capital Structure

26836 Words | 108 PagesNABIL, NIBL, NEA, NTC & HGICL) Table of Contents: Recommendation I Viva- Voce Sheet II Declaration III Acknowledgement IV List of Figures V List of Tables VI Abbreviation VII CHAPTER I. INTRODUCTION Pg No. 1. Background of the study 1 2. History of bank

## Thesis on Capital Structure

26846 Words | 108 PagesCASE STUDY ON NABIL, NIBL, NEA, NTC & HGICL) Table of Contents: Recommendation I Viva- Voce Sheet II Declaration III Acknowledgement IV List of Figures V List of Tables VI Abbreviation VII CHAPTER I. INTRODUCTION Pg No. 1. Background of the study 1 2. History of bank

## Mergers and Acquisitions in Ghana

20927 Words | 84 PagesDECLARATION ii ABSTRACT iii ACKNOWLEDGEMENTS iv DEDICATION v TABLE OF CONTENTS vii LIST OF TABLES vi LIST OF FIGURES vi CHAPTER ONE: INTRODUCTION 1 Background 1 Problem Statement 5 Objectives of Study 6 Significance of Study 6 Structure of the Study 8 CHAPTER TWO: LITERATURE REVIEW 9 Introduction 9 Definitions 9 Classifications of Mergers 11 Reasons For Mergers (Mergers Versus Internal Growth)

## The Impact of the A380 Project on the Financial Performance of EADS

16541 Words | 67 PagesAcknowledgements We would like to express our gratitude to the department for affording us the time and research facilities without which this report would not have been possible. Special thanks go to the head of department Dr. Anders Hederstierna, our supervisor Dr. Britt Aronsson and the course coordinator Dr. Klaus Solberg. Abstract Airbus has been making headlines in the past few months for all the wrong reasons. This iconic European corporation has undergone a turbulent period due to

## Shared Service Center

42220 Words | 169 PagesManagement control in Shared Service Centers - How to influence people in the striving towards organizational goals Authors: Emma Carlsson Ann Schurmann Avdelning, Institution Division, Department Ekonomiska institutionen 581 83 LINKÖPING Språk Language Svenska/Swedish X Engelska/English Rapporttyp Report category Licentiatavhandling Examensarbete C-uppsats X D-uppsats Övrig rapport ____ URL för elektronisk version http://www.ep.liu.se/exjobb/eki/2004/iep/015/ Titel Title Författare Author

### A1 Syllabus FIN 423 SPRING 2015 Financial Analysis And Management Capstone 1

4552 Words | 19 Pages### Risk Mitigation Using Joint Venture Agreement in the Upstream Petroleum Industry

15328 Words | 62 Pages### Thesis on Capital Structure

26836 Words | 108 Pages### Thesis on Capital Structure

26846 Words | 108 Pages### Mergers and Acquisitions in Ghana

20927 Words | 84 Pages### The Impact of the A380 Project on the Financial Performance of EADS

16541 Words | 67 Pages### Shared Service Center

42220 Words | 169 Pages