Home Work

2. Now, regardless of your answer to Question 1, assume that the 5-year bond selling for $800.00, the 15-year bond is selling for $865.49, and the 25-year bond is selling for $1,320.00.

A bond with an annual coupon of $70 and originally sold at par for $1,000. The current market interest rate (yield to maturity) is 8%. This bond will sell at _______. Assuming no change in market interest rates, the bond will present the holder with capital ________ as it matures.

For investors who own the 8.25 May ’00-’05 bond, the current bid price for 8.25 May ‘00-’05 bond is 101.25. To compute the theoretical price we have to use bid prices: (129.71875*0.6875) + (29.90625*0.3125) = $98.5273438. This shows that 8.25 May 00-05 bond is overpriced. The profit earned is 101.123-98.5273 = $2.5977. The investors should sell this bond and replace it with any of the undervalued synthetic bonds preferably the first synthetic bond

One of the negative externalities of the Federal Reserve's zero interest rate policy to stimulate lending and borrowing has been the effect on savers and investors throughout the economic landscape. Historically low rates on CD's, bonds, and treasuries have forced investors to take on more risk in order to meet their required return on investment. Amidst this backdrop Granny Smith has a difficult task ahead of her in saving for her grandchild's college education. Financially savvy, Granny Smith has scoured the internet and found a five year CD at Ally Bank paying 1.72 percent (Bank Rate.com. 2012. PP. 1). She is reluctant to tie up her money for longer than five years given that the stated rate is actually below inflation, which in effect provides her a negative real rate of return. However, she cannot take the risk of losing her $25,000 capital in the stock market, so even if this return over the next five years is the best she can get, that will at least ensure she will have not lost principal.

3. (TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds mature in 25 years. What is the current price of the bond if the YTM is 11 percent? Assume annual payments.

So, the 20 year corporate bond interest rate associated with the company’s rating is 3.86.

Present value: John Hsu wants to start a business in 12 years. He hopes to have $130,000 at that time to invest in the business. To reach his goal, he plans to invest a certain amount today in a bank CD that will pay him 7.50 percent annually. How much will he have to invest today to achieve his target? (Round to the nearest dollar.)

| Consider a one-year discount bond that pays $1,000 one year from now.  If the rate of discount is 7 percent, the present value of the bond isAnswer

Travis Corp.'s bonds currently sell for $1,050. They have an 8% annual coupon rate and a 20-year maturity, but they can be called in 5 years at $1,120. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds?

A tax-exempt bond was recently issued at an annual 8 percent coupon rate and matures 20 years from today. The par value of the bond is $1,000. If a required market rates are 8 per cent, then the market price of a bond will be $1000. In case of falling in the required market rates fall to 5 per cent, then the market price of the bond will be $1,373.87. In another situation, Charles City Hospital plans on issuing a tax-exempt bond at the bond is $1,000. If required market rates are 6 per cent, the value of the bond will be $1229.40. In same case, if the required market rates fall to 12 per cent then the value of the bond will be $701.22. The above bond sells at a discount at the 3 per cent market rate and the same bond will be sold at a premium at 12% market rate of interest (Gapenski,

b. Plot the CAL along with a couple of indifference curves for the investor type identified above. c. Use Excel’s solver to maximize the investor’s utility and confirm that you get a 50% allocation in stocks. 3. You can invest in a risky asset with an expected rate of return of 20% per year and a standard deviation of 40% per year or a risk free asset earning 4% per year or a combination of the two. The borrowing rate is 9% per year. a. What is the range of risk aversion for which a client will neither borrow nor lend, that is, for which the allocation to this risky investment is 100%? b. Draw the Capital Allocation Line. Indicate the points corresponding to (i) 50% in the risk-less asset and 50% in the risky asset; and (ii) -50% in the riskless asset and 150% in the risky asset. c. Compute the expected rate of return and standard deviation for (i) and (ii). d. Suppose you have a target risk level of 50% per year. How would you construct a portfolio of the risky and the riskless asset to attain this target level of risk? What is the

To find the investment that would result in the greatest annual yield we have formulated a linear program that takes into account the requirements for the client of J. D. Williams, Inc. The requirements for the investment portfolio can be found on the section titled “Problem Description”

U.S. Treasury bills and found it to be 5.5%. He has decided to use the rate of change

b) Given the price and the yield to maturity of the bond, calculate the three components of the (expected) total return of this investment (if you invest 100

We begin by specifying the cash flows of each bond and using these and their yields to calculate their current prices: