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PLEASE ROUND TO 2 DECIMALS! THANK YOU

1.) A company issues a 10 year bond, $1,000 face value, 4.5% coupon rate. If the bond sold for $1,045, what is the Yield to Maturity?

2.) For the bond of question 1, that is a $1,000 face value, 4.5% coupon rate, 10 year bond whose price is $1,045. What will be the price of the bond at the end of year 5?, assume the YTM does not change.

3.) The question is written here, but in order to be able to give you partial credit, I will ask for sub-sets of the final answer. Question 3 is composed of questions 3, 4, 5, and 6.

A company issues a 7 year bond, 6% coupon rate, $1,000 face value. This bond sold for $970. When the bond was sold the inflation rate was 1.5%, which changes to 2.5% after the end of year 3.

What is the YTM of this bond when it was issued?

4.) What was the real rate when the bond was issued? (Remember, the real rate is the nominal rate minus the inflation rate).

5.) Since the inflation rate is 2.5% after the end of year 3, what is the new nominal rate?

6.) Use the new nominal rate to calculate the price of the bond at the end of year 3.

7.) For questions 7 through 14, use the following averages and covariance matrix.

AVERAGES

sp500 A B
Average

-0.0069

0.0018

0.0015

covariance matrix:

Sp500 A B
Sp500 0.00336
A 0.00322 0.0041
B 0.0044 0.00514 0.00824

For a portfolio formed by 40% in the SP500 and 60% in A. Calculate the return on the portfolio.

8.) Using the covariance matrix from question 7, calculate the variance of the portfolio formed by 40% in the SP500 and 60% in A.

9.) Using the variance from question 8, calculate the standard deviation of the portfolio formed by 40% in the SP500 and 60% in A.

10.) Using the average and standard deviation from previous questions, calculate the Sharpe ratio for the portfolio formed by 40% in the SP500 and 60% in A.

11.) Using the averages from question 7, calculate the average of a portfolio formed by 30% in A and 70% in B.

12.) Using the covariance matrix from question 7, calculate the variance of a portfolio formed by 30% in A and 70% in B.

13.) Using the variance from question 12, calculate the standard deviation for the portfolio formed by 30% in A and 70% in B.

14.) Using the average and standard deviation from previous questions, calculate the Sharpe ratio for the portfolio formed by 30% in A and 70% in B.

15.) Which of the portfolios offer greater return per unit of risk taken?

a.

The portfolio formed by 30% in A and 70% in B
b.

The portfolio formed by 40% in the SP500 and 60% in A
c.

Both give the same return per unit of risk

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Jarrod Robel
Jarrod RobelLv2
28 Sep 2019

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PLEASE ANSWER ALL QUESTIONS!!!

PLEASE ROUND TO 2 DECIMALS! THANK YOU

1.) A company issues a 10 year bond, $1,000 face value, 4.5% coupon rate. If the bond sold for $1,045, what is the Yield to Maturity?

2.) For the bond of question 1, that is a $1,000 face value, 4.5% coupon rate, 10 year bond whose price is $1,045. What will be the price of the bond at the end of year 5?, assume the YTM does not change.

3.) The question is written here, but in order to be able to give you partial credit, I will ask for sub-sets of the final answer. Question 3 is composed of questions 3, 4, 5, and 6.

A company issues a 7 year bond, 6% coupon rate, $1,000 face value. This bond sold for $970. When the bond was sold the inflation rate was 1.5%, which changes to 2.5% after the end of year 3.

What is the YTM of this bond when it was issued?

4.) What was the real rate when the bond was issued? (Remember, the real rate is the nominal rate minus the inflation rate).

5.) Since the inflation rate is 2.5% after the end of year 3, what is the new nominal rate?

6.) Use the new nominal rate to calculate the price of the bond at the end of year 3.

7.) For questions 7 through 14, use the following averages and covariance matrix.

Suppose you bought a bond with an annual coupon rate of 4.2 percent one year ago for $900. The bond sells for $950 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? b. What was your total nominal rate of return on this investment over the past year? c. If the inflation rate last year was 2.5 percent, what was your total real rate of return on this investment?

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 “Zero-coupon” bonds?

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

McDonalds 5.7% 2039……..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 bond’s 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%

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