FINA 4310 Lecture Notes - Lecture 2: United States Treasury Security, Ted Spread, Interest

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orchidraven224

30 Mar 2020

School

University of Georgia

Department

Finance

Course

FINA 4310

Professor

Kohler

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Document Summary

Slide 17 - treasury bills are very short term money market bonds issued by the u. s. Slide 18 - t-bills do not carry a coupon. Assume the year has 360 days (common for money market) Slide 19 - t-bill quote at the bottom. Dark blue: ask of 4% and bid of 4. 5% Buy at ask and sell at bid. Slide 20 - have to adjust annual discount of 4% for actual term of t-bill. Return is calculated of what we pay for instrument. Return based on what we pay and not discount on par; have to convert to a 365 day year (annualized bond equivalent yield) Slide 21 - t-bill yield flawed for 2 reasons. Slide 22 - 90 day t-bill example. Quoted at an annual discount of 5% Slide 24 - make the adjustments to previous example. Slide 25 - bey is simple interest return (apr rate)

Related Questions

Assume all bonds in these problems are semi-annual bonds with $1000 par value 1. Calculate the yield to maturity for the following corporate bond

Company(Ticker) Coupon Maturity Last Price Merck (MRK) 4.375 April 15, 2031 98.211

2. US Treasury Strips are zero-coupon securities. Suppose you wish to purchase a US Treasury Strip that matures exactly 10 years from now. If the yield on 10-year US Treasury securities is currently 2.40%, what is the correct price quote for this bond? (Use semi- annual compounding).

3. A corporate bond has a coupon rate of 5.5% and a yield to maturity of 4.905%. You buy the bond when it is quoted at 102.10 percent of par. It has been 75 days since the last coupon payment was made. How much must you pay, per bond?

4. RJ Wagner Insurance Co. preferred stock pays a cash dividend of $2.00 per share, per year. The current price of this stock is $51.95. What is the yield on this preferred? Suppose an individual is considering investing in this preferred stock, versus a AAA-rated municipal bond that has a yield to maturity of 2.195%. Which has the higher after tax yield if the investor pays 45% of her income in state and federal income taxes, and the municipal bond interest is tax exempt?

5. Heavy Metal Corporation is expected to generate Free Cash Flow of $75 million in the current year. The free cash flow is expected to grow at a 3% rate forever. Heavy Metal has 20 million shares outstanding, $400 million in debt and no excess cash. The tax rate is 40%, the required return on equity is 12%, and the WACC (cost of capital) is 9%. Compute the Enterprise Value of Heavy Metal and the value of the equity per share.

6a) IBM Corp. earned $12.25 in EPS last year. IBM has recently adopted a long-term target to pay out 50% of all future earnings as dividends. IBMâs dividends and earnings are expected to grow at a constant rate of 3% in the future. You require a 9% rate of return on stock investments of similar risk. What is your estimate of the market value of IBM stock?

6b). Based on the information provided what is the implied return on new investment (ROE*) for IBM.

7. Bunge Corp. earned $9.75 per share and paid $3.25 in dividends in the year just ended. Bungeâs (trailing) P/E ratio is 15.0. If Bunge dividends are expected to grow at a 5% rate forever, what is the expected rate of return on Bunge stock?

8. Monsanto, Corp paid dividends of $8.80 last year. You develop the following forecast for Monsantoâs future dividends: growth of 20% for 2 years, growth of 10% in years 3, 4 and 5, and growth of 5% per year, forever, after year 5. If investors required return on Monsanto stock is 15%, what is the estimated market value according to the multi-stage dividend discount model?

cyanelk22

Bob, Chad and Dylan had been dreaming of this day for the past six years; ever since they first met in an introductory economics course in college. For several years they had been pooling their money and buying Arizona Lottery tickets dreaming that one day they would win big. They realized that the lottery was considered by many to be a voluntary tax on the statistically challenged. But miraculously they now sat at their favorite local âwatering holeâ holding the winning ticket that meant they would split âThe Pickâ jackpot of $6 million. What a great feeling! Now they just needed to decide if they wanted to take their winnings as a lump sum now or to be paid over the next twenty in installments. Bob had been a political science major in college but things hadnât worked out as he anticipated when he was a student. He had entered the job market at what looked now to be the bottom of the economic downturn following the housing crisis in the U.S. Bob believes he did not start his job search soon enough and found suitable openings virtually nonexistent. He was currently working part-time at an organic farm and still living at home which cramped his style consider-ably. He has $150,000 in college related loans (7% interest rate) which he cannot service based on his annual taxable income of $15,000. His share of the jackpot would allow him to be debt free and change his life for the better without doubt. Chad had been more fortunate than Bob. He had applied himself in college and earned a master of accounting degree with an emphasis in taxation. After graduation he immediately went to work for one of the international accounting firms and was now earning a taxable income of $100,000 in spite of the economic issues facing his friend Bob and the country as a whole. He too had debt but not from student loans. Chad had purchased a very nice home in Anthem, Arizona for approximately 50% of what it had sold for three years earlier when built. He had a $250,000 mortgage on the home, at a 4% interest rate, which he saw little reason to pay off since he anticipated significant inflation in the near future. Of the three friends Dylan was by far the most successful. Dylan had majored in finance and had excelled. When he graduated, although he had several attractive offers in the financial services industry, he decided to go into the family business. The company which his father and uncle had started nearly 50 years ago had done amazingly well in the downturn and since he was the only child/nephew they were rewarding him handsomely. He had been reluctant to tell Bob but he was on track to receive to- tal compensation (including bonuses) that yielded a taxable income of $300,000 this year. Unlike his friend Bob, Dylan was frugal and had taken on zero debt. He was pleased with the trioâs good fortune but he didnât think the windfall would change his life all that much. A few days later when the euphoria of winning was subsiding the three friends met again at the same establishment. All four were obviously in good spirits and were looking forward to presenting their winning ticket to Arizona Lottery officials. Chad started the conversation by telling Bob and Dylan that he had taken the initiative of doing some basic research on how âThe Pickâ worked and what the payout options were. Bob, proud of his forethought, produced an article he had saved years earlier from the Arizona Daily Star with the headline âLump-sum Lotto Payout is Best, Experts Say.â Bob excitedly told his buddies that the experts were local CPAs and that clearly the lump-sum payout was âthe way to go.â Dylan said he wanted to hear what Chad had found out since he had gone to the effort of looking into the specifics. Chad (being a tax accountant) had prepared a summary of his research which follows: âA percentage of the proceeds from the sale of Lotto tickets are allocated to a prize pool. The size of the Jackpot that is prominently advertised, six million dollars in this instance, is actually only an estimate. The advertised amount is the sum of the estimated annuity1 payments, without consideration of the time value of money, which Lotto officials believe can be purchased from the prize pool. If the winner chooses the annuity payout multiple insurance companies submit bids. Officials award the bid to the insurance company that offers the largest annual payments in return for the prize pool amount. The insurance company with the best bid typically offers a rate that is near the long term U.S. Treasury Bonds rate (currently 3%). If the winner chooses the Lump Sum payout they simply receive the prize pool amount; the amount that would have been used to buy the annuity.â 1.The term annuity is actually a misnomer. Since the payments are made by the insurance company at the beginning of each of twenty periods it is an annuity due. After reading the summary Bob said he didnât see how this related to the decision that had to be made since he didnât see anything that changed the preferred option being that the lump-sum payout is best. Chad acknowledged that Bob was probably correct but he still wanted to ârun the numbersâ and suggested that Bob and Dylan should do the same. Chad reminded them that they needed to consider the tax consequences of the payout schema and then provided the following schedule of federal income tax rates and reminded them that the state tax rate was an additional 5%.Bob rolled his eyes but said he would get right on it. Dylan thanked Chad for the information and they agreed to meet again tomorrow to decide on the best course of action.

Questions 1. Prepare a personal analysis of the payout options for Bob, Chad and Dylan including their net income after taxes. Designate the preferred option for each individual and explain why.

FINA 4310 Lecture Notes - Lecture 2: United States Treasury Security, Ted Spread, Interest

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