A bond has a modified duration of 8 and convexity of 20. Calculate the 9% price ? from a 5% decline in yield? 60.00% 42.50% 42.00% 40.00% 4.00%
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- A.The inflation premium, when the real interest rate is 2% and the risk-free rate and risk premium are 5% and 3% respectively, is * 10% 8% 5% 3% B. Factors that influence the equilibrium interest rate are * Risk Liquidity preference Inflation All of the above C. A bond that has a Par value greater than its price is called * Discount bond Premium bond Par value bond All of the above D. Because equity holders are the last to receive any distributions, they expect greater returns to compensate them for the additional risk they bear. * True False E. Interest rate is the compensation paid by the lender of funds to the borrower. * True False F. Bonds issued by a corporation are * equity instruments long term debt instruments G. Debt holders claim on income and assets are * Senior to equity holders Subordinate to equity holders None of the above H. Funds provided by the firm’s owners (investors or stockholders) is called * Equity financing Debt financing Borrowed…What is the likelihood of government-issued bonds or treasury securities defaulting? *A. Can't sayB. TwoC. OneD. ZeroE. ThreeAssume the annual fixed term deposit rate is 3.4% in a New Zealandbank. Mary has $10,000 and plans to deposit into the bank for two years. She also wants thebank to reinvest her interests. The bank gives her the option to choose payment frequencyin each year from 1, 2, and 4. The frequency tells how many times the bank pays her theinterests. Suppose there is no interest tax.a) How much Mary will get when the deposit matures after two years, when the interestpayment frequencies per year are 1, 2, and 4 times, respectively? Which option is bestfor Mary? [5 marks]b) Former Chief Economist, John McDermott, in the Reserve Bank of New Zealand, saysthat inflation is a thief in your wallet. Suppose the inflation rate in New Zealand inthe coming a few years is 2%. What are the real rates of returns of the annual bankdeposit rate under the approximation rule, and in the exact relationship, respectively.
- Stock Market Futures Market January KLSE composite index stands at 1162. Investor expects to purchase a RM10million stock portfolio in two months’ time Buys March KLSE CI contracts at 1158 March KLSE composite index has risen to 1171, making the acquisition costs of the shares more expensive. Sells March KLSE CI contracts at 1173 b. Assume that the investor wants to cover the full value of their expected investment. How many March KLSE CI futures contracts must they purchase? c. Calculate the profit/loss on the spot transaction. d. Calculate the profit/loss on the futures transaction. e. Is the hedging strategy efficient?Parker is 50 and wants to retire in 15 years. His family has a history of living well into their 90s. Therefore, he estimates that he will live to age 95. He currently has a salary of $120,000 and expects that he will need about 65% of that amount annually at the beginning of each year if he were retired. He can earn 9 percent in his portfolio while he is working. However, he expects that he will only earn 7 percent in his portfolio during retirement. He expects inflation to continue at 3 percent. Parker currently has $350,000 invested for his retirement. His Social Security benefit in today’s dollars is $30,000 per year at normal age retirement of age 67. His Social Security benefit will be reduced by 6 2/3 percent for each year he begins collecting before full age retirement. How much does he need to save at the end of each ear to meet his retirement goals (assume he does not wish to leave a financial legacy)?9 A program, if implemented, will operate for 10 years for certain. Your best guess is that after year 10 and following each year thereafter there will be a 0.02 probability the program will end. Real net benefits are $25 the first year and are expected to grow 1% per year as long as the program is in operation. Benefits accrue at the end of the year. The real discount rate is 3.5%. What is the NPV of the horizon value of net benefits following year 10, as seen from time 0, the beginning of the first year
- Assume that it is January 1, 2003. The rate of inflation is expected to be 4 percent thought 2003. However, increased government deficits and renewed vigor in the economy are then expected to push information rates higher. Investors expect the inflation rate to be 5 percent in 2004, 6 per percent cent in 2005, and 7 percent in 2006. The real risk-free rate, k*, is expected to remain at 2 percent over the next 5years. Assume that on maturity risk premiums are required on bonds with 5 years of less to maturity. The current interest rate on 5 year T-bonds is 8 Percent. What is the average expected inflation rate over the next 4 year? What should be the prevailing interest rate on 4-year T-bond? What is the implied expected inflation rate in 2007, or Year 5, give that Treasury bonds which mature in the year yield 8 percent?% Return on T-Bills, Stocks And Market Index State of Economy Probability T-Bills Phillips Pay-up Rubber-Made Market index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean Standard Deviation Coefficient of Variation Covariance with MP Correlation with Market Index Beta CAPM Req. Return Valuation (Overvalued/Undervalued/Fairly Valued) Nature of Stock (Aggressive/Defensive) Fill the parts in the above table that are shaded in yellow. Using the data generated in the previous question, plot the Security market line (SML). Superimpose…% Return on T-Bills, Stocks And Market Index State of Economy Probability T-Bills Phillips Pay-up Rubber-Made Market index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean Standard Deviation Coefficient of Variation Covariance with MP Correlation with Market Index Beta CAPM Req. Return Valuation (Overvalued/Undervalued/Fairly Valued) Nature of Stock (Aggressive/Defensive) Fill the parts in the above table that are shaded in yellow. Show the working for the parts in yellow. Using the data generated in the previous question, plot…
- The Determinants of Market Interest Rates Expected Interest Rate The real risk-free rate is 3.5%. Inflation is expected to be 296 this year and 4.75% during the next 2 years. Assume that the maturity risk premium is zero. a. What is the yield on 2-year Treasury securities? Round your answer to two decimal places. placesThe demand curve and supply curve for one-year discountbonds with a face value of $1,000 are represented by thefollowing equations:Bd: Price = -0.8 * Quantity + 1100Bs: Price = Quantity + 680a. What is the expected equilibrium price and quantityof bonds in this market?b. Given your answer to part (a), what is the expectedinterest rate in this marketSM is on sale; all non-perishable goods are discounted by 30%. A man buys 2 pants of P500 each, 2 kg of fish P 60 per lb. and 5 bags of P 550 each. Compute his expected payment.