a. You own a two-bond portfolio. Each has a par value of $1,000. Bond A matures in five years, has a coupon rate of 8 percent, and has an annual yield to maturity of 9.20 percent. Bond B matures in fifteen years, has a coupon rate of 8 percent and has an annual yield to maturity of 9.20 percent. Both bonds pay interest semi-annually. What is the value of your portfolio? What happens to the
value of your portfolio if each yield to maturity rises by one percentage point?
b. Rather than own a five-year bond and a fifteen-year bond, suppose you sell both of them and invest in two ten-year bonds. Each has a coupon rate of 8 percent (semi-annual coupons) and has a yield to maturity of 9.20 percent. What is the value of your portfolio? What happens to the value of your portfolio if the yield to maturity on the bonds rises by one percentage point?
c. Based upon your answers to (a) and (b), evaluate the price changes between the two portfolios. Were the price changes the same? Why or why not?
Task 2:
Construct a spreadsheet to replicate the analysis of the table. Click here to view the table. That is, assume that $10,000 is invested in a single asset that returns 7 percent annually for twenty-five years and $2,000 is placed in five different investments, earning returns of 100 percent, 0 percent, 5 percent, 10 percent, and 12 percent, respectively, over the twenty-year time frame. For each of the questions below, begin with the original scenario presented in the table:
a. Experiment with the return on the fifth asset. How low can the return go and still have the diversified portfolio earn a higher return than the single-asset portfolio?
b. What happens to the value of the diversified portfolio if the first two investments are both a total loss?
c. Suppose the single-asset portfolio earns a return of 8 percent annually. How does the return of the single-asset portfolio compare to that of the five-asset portfolio? How does it compare if the single-asset portfolio earns a 6 percent annual return?
d. Assume that Asset 1 of the diversified portfolio remains a total loss (Γ―ΒΏΒ½100% return) and asset two earns no return. Make a table showing how sensitive the portfolio returns are to a 1-percentage-point change in the return of each of the other three assets. That is, how is the diversified portfolioΓ―ΒΏΒ½s value affected if the return on asset three is 4 percent or 6 percent? If the return on asset four is 9 percent or 11 percent? If the return on asset five is 11 percent? 13 percent? How does the total portfolio value change if each of the three assetΓ―ΒΏΒ½s returns are one percentage point lower than in the table? If they are one percentage point higher?
e. Using the sensitivity analysis of (c) and (d), explain how the two portfolios differ in their sensitivity to different returns on their assets. What are the implications of this for choosing between a single asset portfolio and a diversified portfolio?
Task 3:
Annual savings from Project X include a reduction of ten clerical employees with annual salaries of $15,000 each, $8,000 from reduced production delays, $12,000 from lost sales due to inventory stock-outs, and $3,000 in reduced utility costs. Project X costs $250,000 and will be depreciated over a five-year period using straight-line depreciation. Incremental expenses of the system include two new operators with annual salaries of $40,000 each and operating expenses of $12,000 per year. The firmsΓ―ΒΏΒ½ tax rate is 34 percent.
a. Find Project XΓ―ΒΏΒ½s initial cash outlay.
b. Find the projectΓ―ΒΏΒ½s operating cash flows over the five-year period.
Cash Flow:
Benefits:
Sale Increase: Reduced lost sales from stockouts
Cost reduction: Salary reduction delay
Reduced production delay
Reduction in utility cost
Change in eranings before depreciation:
change in sales + cost reductions
Depreciation expense
benefits from the project:
change in sales + cost reductions
-depreciation
Cost increases:
Annual salary
operating expense
Increase in costs
Earnings before taxes:(benefits less cost increases)
Less: taxes
Earnings after taxes
Annual cash flows=net+depreciation=
C.If the project's required return is 12%, should it be implemented?
Year Cash flow PV at 12%
0
1
2
3
4
5
Please help me with this
