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  1. Consider the following five bonds, all with notional amounts of$100.00, that are trading in a liquid market on September30th 2018
    1. T-bill 1: 1 year maturity, no annual coupon, market price =$99.01
    2. T-bill 1: 3 year maturity, no annual coupon, market price =$92.86
    3. Bond 1: 4 year maturity, 4% annual coupon, market price =$103.92
    4. Bond 2: 5 year maturity, 2% annual coupon, market price =$95.52
    5. Bond 3: 5 year maturity, 8% annual coupon, market price =$123.31

Assume that all coupon and maturitydates align with all cashflows (coupons and notional amounts)paying at September 30th of each year.

Given this market, what are the discount factors and impliedzero coupon rates associated with annual terms 1 – 5 years? (showall your work) …10 marks

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Nelly Stracke
Nelly StrackeLv2
28 Sep 2019

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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%

Please answer all of the following questions

1) The CAPM implies that:

a. investors may invest in assets with expected returns lower than the riskless interest rate.

b. no investor should invest in the risk-free asset.

c. the only relevant measure of risk is standard deviation.

d. the expected return on an efficient portfolio may be lower than the riskless interest rate.

2) In case of a simple CAPM being used to estimate a time series data:

a. the mean of a residual risk should be equal to zero.

b. the regression coefficient should be equal to zero.

c. the difference between the market return and the riskfree rate of return should be equal to zero.

d. the beta of the portfolio should be equal to zero.

3)Which of the following statements is true?

a. An increase in coupons increases the duration of the bond.

b. The longer the maturity of a bond, the greater will be its duration.

c. An increase in the interest rate decreases the duration of the bond.

d. Duration is a measure of the sensitivity of the equities.

4) Which of the following investment strategies is inconsistent with a "contrarian" philosophy

a. buying low, selling high

b. buying when odd-lot buying is lower than normal

c. buying when mutual fund cash positions are low

d. buying when most investment advisory services are bearish

e. selling after a market crash or decline

5) All other things equal, which of the following bond price is more sensitive to interest rate changes?

a. a 10 year bond with a 10% coupon

b. a 20 year bond with a 7% coupon

c. a 20 year bond with a 10% coupon

d. a 30 year bond with 7% coupon

6) Studies of firms classified on the basis of P/E ratios come to the conclusion that low-P/E-ratio stocks earn much higher returns, after adjusting for risk, than high-P/E-ratio stocks. This is because

a. low-P/E-ratio stocks are riskier than high-P/E-ratio stocks.

b. investors like low-P/E-ratio stocks.

c. low-P/E-ratio stocks are more likely to be undervalued.

7) Tests of market efficiency tend to

a. look for statistical dependencies that exist in price changes over time.

b. measure the nature of the impact of new information on security prices as that new information becomes available.

c. search for trading systems that might be able to generate supernormal profits.

d. all of the above

please show me calculation/workings

try to solve as many as possible please

5. Your friend is considering investing $5,000 at the end of every quarter in a bank account

paying 8% per annum. The first contribution will be made at the end of the first quarter. If

interest is compounded monthly, the total amount she will have accumulated at the end of ten

years is closest to:

a) $228,338.

b) $289,731.

c) $302,010.

d) $302,886.

6. Banks A, B and C offer the following interest rates on one-year bank deposits.

Bank A: 7.9% p.a. compounded monthly.

Bank B: 8.0% p.a. compounded quarterly.

Bank C: 8.1% p.a. compounded semi-annually.

The best interest rate is offered by:

a) Bank A.

b) Bank B.

c) Bank C.

d) The three banks offer equally attractive interest rates.

7. You are thinking about buying a rare collectible that costs $50,000. The dealer is proposing

the following deal. She will lend you the money and you will repay the loan by making the

same payment every two years for the next 20 years. If the interest rate is 4% p.a.

compounded annually, the amount you will have to pay every two years is closest to:

a) $3,679.

b) $5,153.

c) $6,165.

d) $7,505.

8. BLB Ltd has just issued a “coupon growth bond” with the following terms. Each bond’s face

value is $1,000 and the bonds will mature in 5 years’ time. Coupons will be paid on an annual

basis at the end of each year. The first year’s coupon will be $100 which will then grow at an

annual rate of 10% until the bonds mature. If the bond’s yield to maturity is 8% per annum, its

price today should be closest to:

a) $972.

b) $1,080.

c) $1,161.

d) $1,275.

9. Consider a five-year bond with a face value of $1,000 paying annual coupons at a rate of 12%

which has a current yield to maturity of 10%. If all interest rates remain unchanged, one year

from today the price of this bond:

a) Will be higher.

b) Will be lower.

c) Will be the same.

d) Cannot be determined without additional information.

10. Your favorite aunty has finally agreed to contribute towards funding your retirement.

Specifically, she will start with a contribution of $6,000 today (that is, end of year 0) but this

amount will then decline at a constant rate of 3% p.a. over the foreseeable future. If the

interest rate appropriate for valuing your aunty’s contribution is 12% p.a. its present value

today is closest to:

a) $38,800.

b) $44,800.

c) $56,000.

d) $70,667.

11. The earnings and dividends of XYX Ltd are expected to grow at a rate of 5%, 10% and 15%

p.a. during years 1 through 3 respectively. After that, the earnings and dividends are expected

to stabilize to a long-run growth rate of 5% p.a. forever. The company’s current dividend per

share is $1.50 and the required rate of return on the stock is 12% p.a. Based on this

information, the current price should be closest to:

a) $21.27.

b) $25.48.

c) $28.07.

d) $29.89.

12. DBD Ltd’s current dividend and price per share are $1.80 and $10.00 respectively. Market

analysts expect the dividend per share to grow at a constant annual rate over the foreseeable

future. If the expected return on this stock is 15% per annum, the constant annual growth rate

implied by this information is closest to:

a) –3.0%.

b) –2.5%.

c) 2.5%.

d) 3.0%.

13. Market analysts expect the earnings per share of JJC Ltd to be $3.00 next year. The company

has typically retained 60% of its earnings and this policy is expected to continue in the

foreseeable future. The return required by investors on companies in JJC’s risk class is 10%

p.a. If the company’s earnings and dividends are expected to grow at a constant rate of 4%

p.a., the current share price is closest to:

a) $20.00.

b) $20.80.

c) $30.00.

d) $31.80.

14. You have just settled a lawsuit in your favor and you will be receiving semi-annual payments

of $25,000 over the next ten years. The first payment will occur six months from today. You

plan on investing these payments and you expect to earn a return of 6% p.a. with the returns

compounded monthly. The present value of this investment is closest to:

a) $329,520.

b) $368,004.

c) $370,642.

d) $371,937.

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