1503 Words7 Pages

E4721
Professor Dastidar
Assignment #1
Question 1
Consider the following data. The column marked n gives the price today of one dollar delivered in half-year n, i.e., of a zero coupon bond which pays $1 in half-year n. In the next two columns there are the cash flows of two bonds, A and B. Essentially, bond A pays a 20% semi-annual coupon and bond B pays a 10% semi-annual coupon. Both bonds mature in 2.5 years, when each also pays its principal of 100. Assume semi-annual compounding.
Half
Year
1
2
3
4
5
n
Bond A Bond B
.95
.91
.87
.80
.70
10
10
10
10
110
5
5
5
5
105
A. Calculate the price of each bond assuming there are no arbitrage opportunities in the market. (That is, calculate the*…show more content…*

(Hint: the Cashflow Column provides what in class notation is C/2.) Print or write down the spot rates and cashflows. 4. For the rest of the question, you do not need to be in front of the Bloomberg terminal, but you need to have in hand the prices, cashflows and spot rates. a. Compute yield using the formulas from class with the observed market price. You are going to recognize an immediate problem: timing of the coupons. To get over this problem, compute the yield under 2 alternative scenarios: rounding back to the last coupon date and rounding forward to the next coupon date. In both cases use the same price. Is the bond yield the same as in part 2? The answer is typically no. b. Using the cashflows and spot rates, compute the price using semi-annual compounding. Is this the same as the observed price? Again, it probably won’t be. 2 E4721 Professor Dastidar Assignment #1 Question 4 a) Suppose an investor has access to two bonds, one with a duration of 1.8 and the other with a duration of 4. You are approached to construct a portfolio of these bonds that has a duration of 7. What percentages of the investor’s portfolio should go into bonds 1 and 2 to achieve this target duration? These durations are modified durations. b) One of these weights is negative. What does this mean in terms of the recommended investment strategy? What problems might there be in implementing your

(Hint: the Cashflow Column provides what in class notation is C/2.) Print or write down the spot rates and cashflows. 4. For the rest of the question, you do not need to be in front of the Bloomberg terminal, but you need to have in hand the prices, cashflows and spot rates. a. Compute yield using the formulas from class with the observed market price. You are going to recognize an immediate problem: timing of the coupons. To get over this problem, compute the yield under 2 alternative scenarios: rounding back to the last coupon date and rounding forward to the next coupon date. In both cases use the same price. Is the bond yield the same as in part 2? The answer is typically no. b. Using the cashflows and spot rates, compute the price using semi-annual compounding. Is this the same as the observed price? Again, it probably won’t be. 2 E4721 Professor Dastidar Assignment #1 Question 4 a) Suppose an investor has access to two bonds, one with a duration of 1.8 and the other with a duration of 4. You are approached to construct a portfolio of these bonds that has a duration of 7. What percentages of the investor’s portfolio should go into bonds 1 and 2 to achieve this target duration? These durations are modified durations. b) One of these weights is negative. What does this mean in terms of the recommended investment strategy? What problems might there be in implementing your

Related

## You Have Just Won The Strayer Lottery Jackpot Of $ 11 000, 000

1295 Words | 6 PagesHomework Set #2 Kaylee McMillin Financial Management 534 Professor Sadu Shetty October 28, 2017 A. You have just won the Strayer Lottery jackpot of $11,000,000. You will be paid in 26 equal annual installments beginning immediately. If you had the money now, you could invest it in an account with a quoted annual interest rate of 9% with monthly compounding of interest. What is the present value of the payments you will receive? The mathematical breakdown below will show the present

## FIN 380 Exam 2 Supplemental Homework Problems

1339 Words | 6 PagesChapter 8 Supplemental Homework/Practice Problems Solutions may be found on the FIN 380 site of i-Tunes U near the bottom of the file list under "Supplemental Homework - Chapter 8" 8-1. AEH, Inc. just paid a $1.00 dividend and is expected to pay a $1.06 dividend next year. What is AEH’s capital gains yield (growth rate, “g”)? 8-2. XYZ, Inc. stock sells for $50.00 and is expected to sell for $54.50 next year. What is XYZ’s capital gains yield (Hint: the percentage change in stock price is

## Busn 379 Finance Entire Course – Devry

5907 Words | 24 Pagescom/downloads/busn-379-finance-entire-course-devry/ BUSN 379 Week 1 Case Study Consumer Behavior -Updated 2016 Case Study Honda’s CS1-2 How could Honda overcome resistance to the idea of a home robot? CS1-3 what concerns might consumers have regarding FRT? BUSN 379 Week 1 Homework-Updated 2016 8. Calculating OCF. Hammett, Inc., has sales of $34,630, costs of $10,340, depreciation expense of $2,520, and interest expense of $1,750. If the tax rate is 35 percent, what is the operating cash flow, or OCF? 14. Weiland Co. shows

## Essay on FNCE 4820 Fall 2013 Midterm 1 with Answers

1922 Words | 8 Pagesof holding a bond. (a) Interest-Rate Risk Risk of price change due to changes in the bond’s yield. (b) Inflation Risk Risk of earning a lower-than-expected real return if inflation exceeds expectations. (c) Liquidity Risk The risk of a large price drop if the bond must be sold quickly or the inability to sell quickly without incurring a large price drop. Note: Liquidity Risk can also refer to the inability of a

## Technical Interview Guide

22795 Words | 92 PagesTechnical Interview Guide Preparation for Finance Interviews Second Edition Copyright 2009 by WallStreetOasis.com. All rights reserved. All information in this guide is subject to change without notice. WallStreetOasis.com makes no claims as to the accuracy and reliability of this guide and the information contained within. No part of this guide may be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without the express written permission of WallStreetOasis

## Bodie, Kane, Marcus Study Guide Essay

40928 Words | 164 PagesEssentials of Investments, by Bodie, Kane and Marcus 8th Edition, Teaching Notes Chapter 01 - Investments: Background and Issues CHAPTER ONE INVESTMENTS: BACKGROUND AND ISSUES CHAPTER OVERVIEW The purpose of this book is to a) help students in their own investing and b) pursue a career in the investments industry. To help accomplish these goals Part 1 of the text (Chapters 1through 4) introduces students to the different investment types, the markets in which the securities trade

## Varian Solution

153645 Words | 615 Pagesindiﬀerent between renting or not renting the apartment. At any price below the reservation price the consumer will demand one apartment, at any price above the reservation price the consumer will demand zero apartments, and exactly at the reservation price the consumer will be indiﬀerent between having zero or one apartment. You should

## Accounting 1-4 Chapter

100452 Words | 402 Pageschapter 1 INTRODUCTION TO FINANCIAL STATEMENTS ● the navigator ● ● ● ● ✓ Scan Study Objectives Read Feature Story Scan Preview Read Text and Answer Do it! p. 5 p. 11 p. 18 p. 20 Work Using the Decision Toolkit Review Summary of Study Objectives Work Comprehensive Do it! p. 23 Answer Self-Test Questions Complete Assignments Go to WileyPLUS for practice and tutorials Read A Look at IFRS p. 42 study objectives After studying this chapter, you should be able to: 1 Describe the primary

## Costco Due Diligence Report

28823 Words | 116 Pages____________________________________________________________ ______ COSTCO WHOLESALE DUE DILIGENCE REPORT Prepared by: Prepared for: Course: Date: April 23, 2011 ____________________________________________________________ ______ Table of Contents Executive Summary…………………………………………………………………. 4 Industry Overview…………………………………………………………………... 5 Corporate Overview………………………………………………………………… 6 SWOT Analysis…………………………………………………………………….. 12 Culture………………………………………………………………………………

## Understanding Marketing Management

16709 Words | 67 PagesPART 1 Understanding Marketing Management Chapter 1 | Defining Marketing for the 21st Century Chapter 2 | Developing Marketing Strategies and Plans a Ch ter p 1 In This Chapter, We Will Address the Following Questions 1. Why is marketing important? 2. What is the scope of marketing? 3. What are some core marketing concepts? 4. How has marketing management changed in recent years? 5. What are the tasks necessary for successful marketing management? One of the key factors in Barack

### You Have Just Won The Strayer Lottery Jackpot Of $ 11 000, 000

1295 Words | 6 Pages### FIN 380 Exam 2 Supplemental Homework Problems

1339 Words | 6 Pages### Busn 379 Finance Entire Course – Devry

5907 Words | 24 Pages### Essay on FNCE 4820 Fall 2013 Midterm 1 with Answers

1922 Words | 8 Pages### Technical Interview Guide

22795 Words | 92 Pages### Bodie, Kane, Marcus Study Guide Essay

40928 Words | 164 Pages### Varian Solution

153645 Words | 615 Pages### Accounting 1-4 Chapter

100452 Words | 402 Pages### Costco Due Diligence Report

28823 Words | 116 Pages### Understanding Marketing Management

16709 Words | 67 Pages