FNCE30001 Study Guide - Final Guide: Liquidity Premium, Liquidity Preference, U.S. Route 30 In Pennsylvania

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lavendermoose527

21 Nov 2018

School

University of Melbourne

Department

Finance

Course

FNCE30001

Professor

Brown

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Document Summary

Problem 1. 1 [question 35 on page 251 of bodie, et al principles of investments] Under the liquidity preference theory, if inflation is expected to be falling over the next few years, long-term interest rates will be higher than short-term rates. Problem 1. 2 [question 36 on page 251 of bodie, et al principles of investments] The following table contains spot rates and forward rates for three years. Problem 3. 1 [question 37 on page 251 of bodie, et al principles of investments] The yield to maturity on one-year zero-coupon bonds is 8%. Problem 3. 2 [question 38 on page 251 of bodie, et al principles of investments] Considering the following par value zero-coupon bonds: Problem 4 [adapted from chapter 10: questions 25 on page 280 of bodie, et al principles of investments] Currently, the zero rates are 7% pa for one year, 8% pa for two years and 9% pa for 3 years.

Related Questions

Short Answer 1-8 [10 points each and each about 1/2 â 1 page double-spaced]:

1. If the spot rate for the Swiss Franc is that 1.05 SF is equal to 1 US $, and the annual interest rate on fixed rate one-year deposits of SF is 0.15% and for US$ is 1.5%, what is the nine-month forward rate for one dollar in terms of SFs? Assuming the same interest rates, what is the 18-month forward rate for one SF in US$s? Is this an indirect or a direct rate? If the forward rate is an accurate predictor of exchange rates, in this case will the SF get stronger or weaker against the dollar? What does this indicate about the marketâs inflation expectations for Switzerland as compared to the United States economy?

2. On June 1st, 2017, Sandoz expects to ship 3 million units of a new drug from its Swiss plant to the US that it will sell through pharmacies on 270-day terms at $95 each. Therefore Sandoz will receive payment from these outlets on February 25th, 2018. Assuming that Sandoz needs to cover its expenses in Switzerland and thus wants to hedge its SF/US$ exposure using a forward contract with a Swiss bank, what is the minimum amount of Swiss Francs they should receive on February 25th, 2018 given 9-month forward rate you calculated in problem one for one US $ in terms of SF? What are two other ways Sandoz might hedge its SF/US$ exposure?

3. In his book Manias, Panics and Crashes (see the Introduction and Chapters posted on the class website) Charles Kindleberger explains the three stages of how a financial crisis develops and evolves over time. Please briefly explain these stages and how the Baltic and Mexican Tequila Crises as presented in Hill text and class case presentation follow this economic pattern or paradigm.

4. Toyota, whose global sales are generally dollar denominated, finds it has excess cash of $85,000,000,000, which it can invest for up to three years. It has determined that its best options are either a three-year Euro-dollar ($) deposit paying 2.65% or a three-year Yen denominated deposit paying 1.55% since it expects the Yen to appreciate 1.2% per annum against the dollar over the next three years. Using cash flow analysis determine the best currency option in which Toyota should invest. Be sure to show your complete calculations of the annual return on each investment possibility at the end of the three-year term. Assume that the annual interest amount is reinvested, i.e. compounds, at the same annual interest rate. Would your answer change if Toyota revised its outlook for the Yen to appreciate 1.1% per year? Show all calculations!!!

5. Country A has 20,000 units of labor and can produce 2 goods, manufactures and food. Aâs producers take 5 units of labor to produce one unit of manufactures and 2 units to produce one unit of food. Country B has 30000 units of labor and takes 3 units to produce one unit of manufactures and 3 units to produce one unit of food. What is price of manufactures in terms of food at which A and B would respectively supply manufactures? What would B export in Adam Smithâs world? What is the amount it could supply?

6. Companies can be hurt by rapid changes in exchange rates even if their initial hedging actions appear reasonable. Explain how the VW case reflects this situation and what it could have done differently to manage the adverse impact of dollar depreciation. 7. Explain how Timberland developed global supply chain problems and then how they developed new logistical and partner relationships that used both IT and a changed physical distribution system to solve these issues.

brownyellowjacket611

All:

Everyone today has to be concerned about being able to retire comfortably when they keep telling us that Social Security will be bankrupt in 2037, a mere 22 years from now, and that it is an entitlement, not something that we and our employers all paid into since we got our first job.

A retirement planner is attached to this message so you can estimate how much money you will need to save to be able to do the things most retirees want to do when they are no longer working.

Then provide your calculations to the class and make a statement as to what you think and if you can achieve it?

For Week 3, please turn in the answers to the following questions:

1. Define the following terms as they apply to bonds:

a. Face value

b. Maturity date

c. Coupon interest (including coupon interest rate)

d. Current yield

e. Yield to maturity (YTM)

f. Yield to call (YTC)

g. Call premium

2. What are âZero-couponâ bonds?

3. Suppose you see the following bond price quote in the newspaper:

McDonalds 5.7% 2039â¦â¦..122.733

What can you tell about this bond from reading the price quote?

4. (calculating the present value of a bond) If a corporate bond with a face value of $1,000 has 24 years to go until it matures, has a coupon interest rate of 5.7% and a yield to maturity (YTM) of 4.201%, what should be its price in the bond market (ie, PV)?

5. (calculating the current yield of a bond) If a corporate bond with a face value of $1,000 has 24 years to go until it matures, has a coupon interest rate of 5.7% and a market price of $1,223.92, what is its current yield?

6. (calculating the YTM of a bond) If a corporate bond with a face value of $1,000 has 24 years to go until it matures, has a coupon interest rate of 5.7% and a market price of $1,223.92, what is its yield to maturity (YTM)?

7. (calculating the YTC of a bond) Assume a callable corporate bond with a face value of $1,000, a coupon interest rate of 5.7%, a market price of $1,223.92, and a call premium of 6%. Assume also that the bond has 24 years to go until it matures, but it is callable after 14 years. What is the bondâs yield to call (YTC)?

8. (calculating the present value of a bond with semi-annual coupon interest payments) If a corporate bond with a face value of $1,000 has 24 years to go until it matures, has a coupon interest rate of 5.7%, paid semiannually, and has a yield to maturity (YTM) of 4.2%, what should be its price in the bond market (ie, PV)?

9. (calculating the YTM of a bond with semiannual interest payments) If a corporate bond with a face value of $1,000 has 24 years to go until it matures, has a coupon interest rate of 5.7%, paid semiannually, and has a market price of $1,223.92, what is its yield to maturity (YTM)?

10. Define the following terms as they apply to interest rates:

a. The real risk-free rate (r*)

b. The nominal risk-free rate (Rrf)

c. The inflation premium (IP)

d. The default risk premium (DRP)

e. The liquidity premium (LP)

f. The maturity risk premium (MRP)

11. Assume the real risk-free rate is 1%. Assume also that inflation is expected to be 1% in the coming year (year 1), 2% in the next year after that (year 2), and 3% in the year after that (year 3). Assume also that the default risk premium, the liquidity premium, and the maturity risk premium are 0%. Given these conditions, what would be the yield on three-year treasury bonds today?

12. Suppose the First Bank of St Louis was offering the following rates on certificates of deposit (CDs) this week:

Maturity Rate

3 month 1.50%

6 month 1.75%

1 year 2.00%

2 year 2.25%

3 year 2.50%

5 year 2.75%

10 year 3.00%

20 year 3.15%

a. Plot the above data on a yield curve. Label the graph and the axes appropriately.

b. Comment on the implications of this curve to you, as a potential investor in CDs.

End of assignment questions

(see answers to numerical problems on the next page)

Answers to numerical problems:

Question 4: $1,223.92

Question 5: 4.66%

Question 6: 4.2%

Question 7: 3.92%

Question 8: $1,225.44

Question 9: 4.21%

Question 11: 3.0%

FNCE30001 Study Guide - Final Guide: Liquidity Premium, Liquidity Preference, U.S. Route 30 In Pennsylvania

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