Finance Term Paper

738 Words3 Pages
University of Texas at Dallas
Jindal School of Management

Problem Set #3
Fall 2014
Important note: Please submit paper copy of your solutions
Due Dates: Dec. 8 for Section 002 and Section 501; Dec. 9 for Section 001 (all in-class)

1. Suppose you are a portfolio manager at Paulson & Co. Inc. Today is the last day of
April 2013. Your portfolio did not do well in the most recent month. After learning about the post earnings announcement drift, you decide to give it a try. You gather most recent earnings information on 100 stocks as of April 30 2013. After examining the earnings surprises, you decide to buy an equally weighted portfolio of the top 10 stocks with the most positive earnings surprises. At the same time,
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(a) What is the annual coupon payment of a bond that trades at par and has the yield to maturity equal to the interest rate, 4%? The bond has a face value of $1,000 and pays annual coupons.
(b) What is the price of an annual coupon bond with a face value of $1,000, a coupon rate of 10%, and 30 years to maturity?

4. Suppose the term structure of interest rates are not flat. The one year spot rate, r1 , is
6.01%/year, the two-year and the three-year spot rates, r2 and r3 , are both 5%/year.
(a) What are the forward interest rates for the second and the third year?
(b) Consider a zero-coupon bond with the face value of $1,000 and three years to maturity. What should be the bond price today?
5. In your calculations, please round computed prices to the second decimal place (e.g.,
220.78 instead of 220.7765).
A risk-free annuity A pays two annual payments of $100 (the first payment is made in a year).
(a) If the term structure of interest rates is flat and the interest rate is 61.80%/year, what is the price of the annuity?
(b) What is the yield to maturity of the annuity?
(c) The term structure suddenly changes and now the spot interest rate for one year
(r1 ) is 80%/year and the spot interest rate for two years (r2 ) is 50%/year. As it turns out, the price of the annuity stays the same as in part (a). What is the yield to maturity of the annuity now?
(d) Suppose that there are two

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