FIN 3636 Final: Final Cheat Sheet

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viridianpug644

24 Jun 2014

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Chapter 3 yield to maturity = pv analysis, most accurate measure of interest rates. Equates today"s value with pv of all future payments. Pv=x/(1+i)^n p=c/i (fixed coupon payment) i=(f-p)/p (one year discount bond) 1. When bond is at par, yield equals coupon rate. Yield greater (less) than coupon rate when bond price is below par value discount (premium) bond. Real interest rate = i(r) pi rate of return = c+p(t+1)-p(t)/p(t)=i(c)+g i(c)=c/p(t)=current yield g=p(t+1)-p(t)/p(t)=capital gain 1. Only bond whose return = yield is on with maturity = holding period 2. For bonds with maturity > holding period, i up, p down implying capital loss 3. Longer is maturity, geater is price change associated with interest rate change 4. Longer is maturity, more return changes with change in interest rate 5. Bond with high initial rate can still have negative return is i up.

Related Questions

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

Money, Banking, and Financial Markets, 3/e- quiz, Stephen G.Cecchetti, Kermit L. Schoenholtz
Question Details
Pls solve the quiz and EXPLAIN YOUR ANSWERS, I NEED TO LEARN THECALCULATIONS. Thank you.

Multiple Choice Quiz
1
If the annual interest rate is 5% (.05), the price of a one yearTreasury bill would be:
(Hint: T-Bills have $100 face value)
A) $95.00
B) $97.50
C) $95.24
D) $96.10
2
If the annual interest rate is 5%, the price of a three-monthTreasury bill would be:
(Hint: T-Bills have $100 face value)
A) $98.79
B) $95.00
C) $98.75
D) $97.59
3
If a consol is offering an annual coupon of $50 and the annualinterest rate is 6%, the price of the consol is:
A) $47.17
B) $813.00
C) $833.33
D) None of the above
4
A $1000 face value bond purchased for $965.00, with an annualcoupon of $60, and 20 years to maturity has:
A) A current yield equal to 6.22%.
B) A current yield equal to 6.00%.
C) A coupon rate equal to 6.22%.
D) A yield to maturity and current yield equal to 6.00%.
E) A yield to maturity and coupon rate equal to 6.00%.
5
A $1000 face value bond, with an annual coupon of $40, one year tomaturity and a purchase price of $980:
A) Has a current yield that equals 4.00%.
B) Has a coupon rate that equals 4.80%.
C) Has a current yield that equals 4.08% and a yield to maturitythat equals 6.12%.
D) Has a current yield that equals 4.08% and a yield to maturitythat equals 4.0%.
6
If a one year bond has a face value of $100 and is purchased for$94, and is held to maturity:
A) The holding period return will equal the yield tomaturity.
B) The yield to maturity will exceed the holding periodreturn.
C) The yield to maturity will be 6.38%.
D) a and c.
7
A 30-year Treasury bond as a face value of $1,000, price of $1,200with a $50 coupon payment. Assume the price of this bond decreasesto $1,100 over the next year. The one-year holding period return isequal to:
A) -9.17%
B) -8.33%
C) -4.17%
D) -3.79%

8
If a one-year zero-coupon bond has a face value of $100, ispurchased for $94, and is held to maturity:
A) The holding period return will exceed the yield tomaturity.
B) The yield to maturity will exceed the holding periodreturn.
C) The yield to maturity will be 6.38%.
D) The holding period return will be 6.38%.

9
Consider a zero-coupon bond with a $1,100 payment in one year.Suppose the interest rate decreases from 10% to 8%. The price ofthis bond:
A) Increases from $1,000 to $1,018.
B) Increases from $1,000 to $1,375.
C) Decreases from $110 to $88.
D) Decreases from $1,210 to $1,188.
10
Consider a $1,000 face value bond with a $55 coupon payment and 1year to maturity. Calculate the current yield, coupon rate and theyield to maturity if the bond is purchased for $940.
A) Current yield = 5.50%, coupon rate = 5.50%, yield to maturity =12.23%.
B) Current yield = 5.85%, coupon rate = 5.50%, yield to maturity =12.23%.
C) Current yield = 5.85%, coupon rate = 5.00%, yield to maturity =6.38%.
D) Current yield = 5.50%, coupon rate = 5.00%, yield to maturity =6.38%.

11
Consider a $1,000 face value bond with a $55 coupon payment and 1year to maturity. Calculate the current yield, coupon rate and theyield to maturity if the bond is purchased for $1,130.
A) Current yield = 5.50%, coupon rate = 4.87%, yield to maturity =5.00%.
B) Current yield = 5.50%, coupon rate = 5.50%, yield to maturity =-6.64%.
C) Current yield = 4.87%, coupon rate = 5.50%, yield to maturity =-6.64%.
D) Current yield = 4.87%, coupon rate = 5.00%, yield to maturity =-5.00%.

12
If the U.S. government's borrowing needs increase, all otherfactors constant:
A) The demand for bonds will decrease.
B) The price of bonds will increase.
C) The supply of bonds will increase.
D) The yields on bonds will decrease.
13
Consider a two-year, 4.5% coupon bond with a $500 face value thatis originally purchased for $475. Calculate the holding periodreturn of this bond if it is sold after one year at a price of$485.
A) 6.84%
B) 6.50%
C) 11.58%
D) 3.05%
14
Consider a two-year, 8% coupon bond with a $1,500 face value thatis originally purchased for $1,490. Calculate the holding periodreturn of this bond if it is sold after one year at a price of$1,505.
A) 8.67%
B) 9.06%
C) 1.54%
D) 6.38%
15
If the risk on foreign government bonds increases relative to U.S.government bonds, the price of U.S. government bonds should:
A) Not change since U.S. government bonds are free of defaultrisk.
B) Decrease since people will bail out of all governmentbonds.
C) Increase as the demand for these bonds increases.
D) Not be affected because the two types of bonds are traded indifferent markets.

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%?

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FIN 3636 Final: Final Cheat Sheet

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