FINA 395 Study Guide - Final Guide: Efficient-Market Hypothesis, Tax Bracket, Golden Parachute

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skyreindeer620

16 Nov 2017

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These multiple choice questions (1-10) are worth 3 points each. Interest is compounded semiannually . : ,531, ,427, ,818, ,469, ,037. The value of a 20 year zero-coupon bond when the market required rate of return of 9% (with semi-annual compounding) is: : . 64, . 38, . 93, . 43, none of the above. Which of the following bonds" price would be the most sensitive to an unexpected change in the interest rate? (the market interest rate is 8% (ear) for all the bonds below. ) A discount (or zero coupon) bond with 7 years to maturity. A discount (or zero coupon) bond with 10 years to maturity. A bond with annual coupons, a 5% coupon rate and 7 years to maturity. A bond with semi-annual coupons, a 10% coupon rate and 7 years to maturity. A bond with annual coupons, 10% coupon rate 10 years to maturity. The reinvestment rate is 10% and refinancing rate is 15%.

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Note: If not otherwise stated, assume that:

â¢ Yield-to-maturity (YTM) is an APR, semi-annuallycompounded

â¢ Bonds have a face value of $1,000

â¢ Coupon bonds make semi-annual coupon payments; however, couponrates (rc) are annual rates, i.e., bonds make a semi-annual couponpayment of rc/2

You must invest $100,000, and the bonds listed below from Ato E are the only investments available today (assume that it ispossible to buy a fraction of a bond in order to invest the full$100,000). The same 6% market interest rate (APR, compoundedsemi-annually) applies to all of these bonds and they have thefollowing additional characteristics:

A. 6 years to maturity and 4% coupon rate (coupons paidannually)

B. 3 years to maturity and 7% coupon rate (coupons paidsemi-annually)

C. 6 years to maturity and 0% coupon rate (discount orzero-coupon bond)

D. 3 years to maturity and 4% coupon rate (coupons paidsemi-annually)

E. 6 years to maturity and 4% coupon rate (coupons paidsemi-annually)

a) Rank these bonds according to their interest ratesensitivities, from the most interest rate sensitive to the leastinterest rate sensitive.

Select one:

ABCDE

CAEDB

CEABD

DBAEC

BDEAC

AECDB

EACBD

CDEAB

b) If you want to benefit from an unexpected decrease inmarket interest rates, which bond would you purchase?

Select one:

c) If you want to minimize interest rate risk, whichbond would you purchase?

Select one:

d) What is the duration (in years) of the bond you chosein part c)?

Select one:

0.32 years

2.76 years

2.84 years

5.68 years

5.52 years

2.34 years

1.98 years

3.96 years

NOTE: Please show all the work, without using excel (step bystep with equations) Thanks!

coraldeer83

Suppose theâ current, zero-coupon, yield curve forâ risk-free bonds is asâ follows:

Maturityâ (years)	1	2	3	4	5
Yield to Maturity	4.51	4.84	5.00â%	5.12â%	5.37â%

a. What is the price per $100 face value of a 3â-year, zero-coupon risk-freeâ bond?

b. What is the price per $100 face value of a 5â-year, zero-coupon, risk-freeâ bond?

c. What is theâ risk-free interest rate for a 3â-year maturity?

Noteâ: Assume annual compounding.

blushsea-lion802

A company must pay $5000 at the end of each year for 4 years. Given the following four bonds construct a dedicated bond portfolio that eliminates interest rate risk. Determine the face value (to the cent) of each of the following bonds purchased.

BOND A: 1-year bond with 4% annual coupon, redeemable at 103%

ANS

BOND B: 2-year zero coupon bond, redeemable at par.

ANS

BOND C: 3-year bond with 5% annual coupons, redeemable at par

ANS

BOND D: 4-year bond with 5.5% annual coupons, redeemable at par

ANS

apricotturtle245

FINA 395 Study Guide - Final Guide: Efficient-Market Hypothesis, Tax Bracket, Golden Parachute

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