ADM 3352 Lecture Notes - Lecture 4: Money Market Fund, Risk Aversion, Standard Deviation

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goldpig262

1 Nov 2014

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Chapter 4: your holding period return for the next year on the money market fund depends on what 30-day interest rates will be each month when it is time to roll over maturing securities. The one-year savings deposit will offer a 7. 5 percent holding period return for the year. If you forecast the rate on money market instruments to rise significantly above the current yield of 6 percent, then the money market fund might result in a higher hpr for the year. Statement (c): let s = the annual standard deviation of the risky investments and s = the standard deviation of the first investment alternative over the two-year period. Therefore, the annualized standard deviation for the first investment alternative is equal to s s. Statement (e): the first investment alternative is more attractive to investors with lower degrees of risk aversion.

Related Questions

What would you be willing to pay for a $1,000 bond paying $70 interest at the end of each year and maturing in 25 years if you wanted the bond to yield the following rates of return? a. 5 percent b. 7 percent c. 12 percent (Note: At maturity, the bond will be retired and the holder will receive $1,000 in cash. Bonds are typically issued with $1,000 face, or par, values. The actual market value at any point in time will tend to rise as interest rates fall and fall as interest rates rise.)

coffeegrasshopper541

A. Tesla Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 9 percent. What will these bonds sell for at issuance?

B. You want to have $1.5 million in real dollars in an account when you retire in 40 years. The nominal return on your investment is 11 percent and the inflation rate is 3.8 percent. What real amount must you deposit each year to achieve your goal?

C. Both Bond Sam and Bond Dave have 9 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has has 3 years to maturity, whereas Bond Dave has 20 years to maturity. If interest rates suddenly rise by 2 percent,

C.1 what is the percentage change in the price of Bond Sam?

C.2. Of Bond Dave?

C.3. If rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Bond Sam be then?

C.4. Of Bond Dave?

tealseal860

The YTM on a bond is the interest rate you earn on your investment if interest rates donât change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY).

Suppose that today you buy a bond with an annual coupon of 9 percent for $1,110. The bond has 16 years to maturity. What rate of return do you expect to earn on your investment?

b-1.

Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. What price will your bond sell for?

b-2.

What is the HPY on your investment?

ceruleancricket221

ADM 3352 Lecture Notes - Lecture 4: Money Market Fund, Risk Aversion, Standard Deviation

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