SMG FE 101 Study Guide - Final Guide: Yield Curve, Discount Window, Cash Flow

90 views8 pages

peachreindeer971

24 Nov 2017

School

Department

Course

Professor

For unlimited access to Study Guides, a Grade+ subscription is required.

Document Summary

The yield curve and discount rate: term structure, the relationship between investment term and interest rate, yield curve, plot of (cid:271)o(cid:374)d (cid:455)ield as a fu(cid:374)(cid:272)tio(cid:374) of (cid:271)o(cid:374)ds" (cid:373)atu(cid:396)it(cid:455) (cid:396)ate, risk free interest rate: Longer maturity = higher yield: shorter maturity = lower yield. Unpredictable changes in rate also affect prices. A) long term bond to be riskier than short term bond. B) if the maturity is the same, bond with high cpn rate is less sensitive than lower coupon rates higher coupon rate pays higher cash flows up-front: effect of time of bond price. Coupon bond: zig zag pattern: the price increases before the payment is made and decreases after the payment is made. Us t-securities are risk-free because the notion of gov cannot fail (printing money, raising tax) Yield to maturity of a defaultable bond is not equal to the expected return of investing in the bond.

Related Questions

Which of the following factors will lead to an increase in interest rates?

a Recession

b Trade surplus

c Contraction

d Deflation

e Federal deficit

The book value of 4 million shares of Zircon Global Ltd. is $34 million. What is the book value per share of Zircon Global Ltd?

a $8.50 per share

b $0.60 per share

c $136.00 per share

d $4.00 per share

e $30.00 per share

The percentage rate of return that investors earn on a bond consists of a(n):

a interest yield plus the maturity value of the bond.

b market interest rate plus the coupon interest rate.

c interest yield plus a capital gains yield.

Having the manager's compensation tied to the company's performance increases the agency problem that corporations face.

a true

b false

The present value of an investment increases as the opportunity cost rate (interest rate) increases.

a false

b true

Which of the following is the yield of a bond that offers a risk-free rate of 4% and a risk premium of 2%?

a 2%

b 8%

c 6%

d 12%

Which of the following bonds pays interest based on an inflation index?

a Income bonds

b Purchasing power bonds

c Treasury bills Floating-rate bonds

d Zero coupon bonds

cyanworm769

Please can someone help me with this :

Minicase 1

Interest Rates, Bond Yields, and Duration

CONCEPTS IN THIS CASE

simple loans
fixed-payment loans
coupon bonds
present value
yield-to-maturity
current yield
nominal and real interest rates
rate of return
capital gain
interest-rate and reinvestment risk
duration

You have been hired to analyze the debt securities of your organization. The firm has outstanding loans and bonds. A quick review of the balance sheet shows the following:

	Liability Amount ($)	Nominal Interest (coupon) Rate	Years to Maturity
Selected Liabilities of the firm
Simple Loans	800	5%	1
Fixed-Payment Loans	5,000	12%	19
Long-term Bonds #1	500,000	10%	4
Long-term Bonds #2	1,080,000	10%	10
Liabilities Total	1,585,800

Market Price for Bond #1	930.50
Market Price for Bond #2	859.50
Face Value of Each Bond	1,000.00
Selected Current Assets of the firm
Marketable Securities:
Treasury Bills	100,000

Note: Treasury Bills have a $10,000 face value, which matures in one year. Each Treasury Bill has a cost of $9,580.00

How much interest would the firm pay each year on the simple-interest loan?

How much would you write a cheque for to pay off the loan in one year?

What is the monthly payment needed to pay off the fixed-payment loans?

What is the current yield for each bond if the current price is:

$930.50 for Bond #1?

$859.50 for Bond #2?

What is the expected yield to maturity for each bond?

Bond #1 selling for $930.50?

Bond #2 selling for $859.50

What is the rate of capital gain if both bonds sell for $900.00 in one year?

Bond #1 selling for $930.50 today?

Bond #2 selling for $859.50 today?

If the Yield to Maturity expected by investors changes to 11%:

What will be the market price of Bond #1?

What will be the market price for Bond #2?

What will be the dollar change in price for Bond #1?

What will be the dollar change in price for Bond #2?

What will be the percent change in price for Bond #1?

What will be the percent change in price for Bond #2?

Since the change in expected yield to maturity is the same, why is the amount of change different between the bonds?

If investors holding our 4-year bonds (Bond #1) receive interest income annually for four years, plus the face value of the bonds at maturity,

What will be the total interest earned on the bond over the next four years?

What will be the face value received at maturity?

Given the following projected income stream for Bond #1:

			Projected Reinvestment Rates
Year	Coupon Interest ($)	Face Value ($)	10%	5%
1	100
2	100		10.00	5.00
3	100		21.00	10.25
4	100	1000	33.10	15.76
Total Income	400	1000	64.10	31.01

What is the total cash available over the next four years to the bond holder earning

10%

15%

What is the average annual rate of return for the bond holder earning

10%

15%

Why does the reinvestment rate affect the annual rate of return for the same bond?

If the expected rate of return on our bonds is 10%, what is the duration of Bond #1?

What is the yield to maturity on the Treasury Bills (a discount bond)?

What is the real rate of interest if the nominal rate is 10% and the inflation rate is 3%?

amethystcrow453

1. Which, if any, of the following statements are false?

A. For a given coupon rate, the sensitivity of bond prices to changes in interest rates increases at an increasing rate as maturity increases.

B. For a given absolute change in interest rates from the same base level, the proportionate increase in bond prices when rates fall is larger than the proportionate decrease in bond prices when rates rise.

C. For identical coupon rates and a given absolute change in interest rates from the same base level, long-term bonds change proportionately more in price than short-term bonds.

D. For identical maturities and a given absolute change in interest rates from the same base level, low-coupon bonds change proportionately less in price than high-coupon bonds.

2. What are the duration and modified duration of a seven-year, 3.5 percent coupon rate, annual coupon payment, $1000 par value government note priced today to yield 3 percent to maturity (use the text formulas or Excelâs Duration and MDuration functions)? What is the convexity of this instrument? [Recall that Bonds and Bond Properties.xls illustrates these calculations.] Using one of the following approximation formulas with yield data in decimal form,

[if text formula] % Change in Price 100 (-1.0 Duration (YieldNew-YieldOld)/(1+YieldOld)),

[if Excel function] % Change in Price 100 (-1.0 MDuration (YieldNew-YieldOld)),

what is the approximate percentage change in this bond's price if yields on comparable securities rise to 4 percent? What is the actual percentage change in this bond's price if yields on comparable securities rise to 4percent (use a financial calculator or Excelâs PV function)?

3. Consider the dividend discount model, the capital asset pricing model, the arbitrage pricing model and the firm valuation model. If these accurately portray the intrinsic values of stock prices and stock returns, then what is the corresponding fundamental relationship between stock prices and interest rates? Explain your answers.

limemouse200

SMG FE 101 Study Guide - Final Guide: Yield Curve, Discount Window, Cash Flow

Document Summary

Get access

Related Documents

SMG FE 101 Lecture Notes - Lecture 9: Dividend Yield, Yield Curve, Accrued Interest

SMG FE 101 Lecture Notes - Lecture 8: Excess Reserves, United States Treasury Security, Notional Amount

SMG FE 101 Lecture Notes - Lecture 9: Risk Premium, Fair Market Value, Preferred Stock

Related Questions