FIN301 Final: Final Finance 301 Cheat Sheet TU.docx

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taupeskunk908

1 Jun 2014

School

University of Alberta

Department

Finance

Course

FIN301

Professor

Lukas Roth

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Document Summary

N(d1)- e- rt k n(d2) ] = rf + b i e rm[ Longer maturity/lower coupon rate/less frequent coupons, high duration. Duration underestimates gains/overestimates loss if r changes by 1%, bond price changes by %duration. Effectiverate=(1+ear) if compounding pd= paymnt freq , asap. 1 m 1 zero coupon bond= duration/maturity (6 yr 0 coupon bond has d=6) Usually quoted apr semi annual rate need ear monthly. Po= c (1+r)t]+ f r [1 1 (1+r)t. To discount it you either use nominal pv and nominal rate to discount or inflation pv over the real rate. Po= d (1+r)t = d r (cid:230) (cid:231) (cid:246) (cid:230) (cid:231) (cid:246) b b b. But if given a finite time use an annuity: Po= (1+g)t r g[1 (1+r)t] r [1 1 (1+r)t] = 1 r means nogrowth g=b roe if r > roe , shareholders are . Front loaded cash flows have higher irr but less npv than back loaded else, value destroying.

Related Questions

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

You plan to buy a car 3 years from now and plan to take out a 3-year car loan. Given the following yield curve and assume that the spot rates are continuous compounded, what will be the interest rate for your car loan?

Yrs to Maturity	1	2	3	4	5	6	7
% yield	4	5	6	7	8	9	10

2. Given the following treasury bonds, calculate the 18-month zero rate. Assume face value of each bond is 100 and coupons are paid semi-annually.

Bond	Yrs to Maturity	Annual coupon rate%	Bond price
A	0.5	0	98
B	1	8	98
C	1.5	9	104

Avicorp has a $15.5 million debt issue outstanding, with a 6.3% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 92% of par value. a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return. (Another note: The pre-tax cost of debt is the yield to maturity (YTM) on the outstanding debt issue. We solve for the 6-month YTM on the bond: (This is what I have so far... not sure how they got $920 here:) ** $920 = (31.50/(1+YTM)) + (31.50/(1+YTM)^2)) + (31.50/(1+YTM)^9)) + (31.50 + 1,000)/(1+YTM)^10) Therefore, YTM = 4.1434% Then compute the effective annual return (EAR) as: EAR = (1 + 0.041434)^2 -1 = 0.084585 The pre-tax cost of debt is 4.1434% every 6 months, or 8.4585% per year. b. If Avicorp faces a 40% tax rate, what is its after-tax cost of debt? After-tax cost of debt = EAR x (1-TC) where Tc is Avicorp's tax rate. Then, After- tax cost of debt = 0.084585 x (1-0.4) = 0.050751 If Avicorps faces a 40% tax rate, the after-tax cost of debt is 5.0751%.

FIN301 Final: Final Finance 301 Cheat Sheet TU.docx

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