Bus 405 Week 3 Chapter 10 Bond Prices And Yields

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This paperwork of BUS 405 Week 3 Chapter 10 Bond Prices and Yields contains: 1. Which one of the following is the correct definition of a coupon rate? 2. What is the annual interest divided by the market price of a bond called? 3. The yield to maturity is the: 4. A premium bond is defined as a bond that: 5. A discount bond: 6. The price of a bond, net of accrued interest, is referred to as the bond's: 7. The dirty price of a bond is the: 8. A callable bond: 9. Which one of the following does an issuer pay to redeem a bond prior to maturity? 10. Which one of the following prices is equal to the present value of a bond's future cash flows and is paid when a bond is redeemed prior to maturity? 11. An issuer has a bond outstanding that matures in 18 years. Which one of the following prevents the issuer from buying back that bond today? 12. The yield that a bond will earn given that it is bought back by the issuer at the earliest possible date is the: 13. Which one of the following is the risk that market interest rates may increase causing the price of a bond to decline? 14. The rate of return an investor actually earns from owning a bond is called which one of the following? 15. Which one of the following measures a bond's sensitivity to changes in market interest rates? 16. A change in a bond's price caused by which one of the following is defined as the dollar value of an 01? 17. The yield value of a 32nd is the change needed in which one of the following to cause a bond's price to change by 1/32nd? 18. A dedicated portfolio is a bond portfolio created to: 19. Which one of the following risks is associated with investing a coupon payment at a rate that is lower than the bond's yield-to-maturity? 20. Which one of the following involves creating a portfolio in a manner which minimizes the uncertainty of the portfolio's maturity target date value? 21. Price risk is the risk that: 22. Periodically rebalancing a portfolio so that the duration continues to match the target date is called: 23. A basic bond that has a face value of $1,000 and pays regular semiannual coupon payments is referred to as which one of the following? 24. Which of the following will increase if the coupon rate increases? I. face value II. market value III. yield-to-maturity IV. current yield 25. Which one of the following will decrease the current yield of a bond? 26. Which one of the following will occur if a bond's discount rate is lowered? 27. Which one of the following statements is correct concerning premium bonds? 28. Which one of the following statements is correct concerning discount bonds? 29. Which one of the following statements applies to a par value bond? 30. Assuming there is no default risk, both a premium bond and a discount bond must share which one of the following characteristics? 31. A bond has a current yield that is equal to the yield-to-maturity. Given this, which one of the following must also be true? 32. For a premium bond, the: 33. Davis Industrial bonds have a current market price of $990 and a 6 percent coupon. The bonds pay interest semi-annually on March 1 and September 1. Assume today is January 1. How many months of accrued interest are included in the dirty price of these bonds? 34. A bond pays interest semiannually on February 1 and August 1. Assume today is October 1. How many months of accrued interest are included in the clean price of this bond? 35. The yield-to-maturity assumes which one of the following? 36. Which one of the following increases the probability that a bond will be called? 37. Which one of the following statements is correct concerning a callable bond that is currently selling below face value? Assume there is no risk of default. Also assume the issuer only calls bonds when they can be refinanced at a lower rate of interest. 38. Which one of the following statements is correct? 39. According to Malkiel's theorems, bond prices and bond yields are: 40. Which combination of bond characteristics causes a bond to be most sensitive to changes in market interest rates? I. low coupon rates II. high coupon rates III. short time to maturity IV. long time to maturity 41. How does the size of the change in a bond's price react in response to a given change in the yield to maturity as the time to maturity increases? 42. Which one of the following statements is correct according to Malkiel's Theorems? 43. Which one of the following must be equal for two bonds if they are to have similar changes in their prices given a relatively small change in bond yields? 44. All else constant, which of the following will decrease the Macaulay duration of a straight bond? I. reducing the coupon payment II. shortening the time to maturity III. lowering the yield to maturity 45. Which one of the following statements is correct concerning Macaulay duration? 46. The modified duration: 47. To immunize your portfolio, you should: 48. Last year, you created an immunized portfolio with an average maturity date of 14.5 years, a yield-tomaturity of 9.8 percent, and a duration of 9.6 years. According to the policy of dynamic immunization, you should now modify your portfolio in which one of the following ways? 49. Dynamic immunization is primarily aimed at reducing which one of the following risks? 50. A bond pays semiannual interest payments of $37.50. What is the coupon rate if the par value is $1,000? 51. A bond has a face value of $1,000 and a coupon rate of 5.5 percent. What is your annual interest payment if you own 8 of these bonds? 52. A bond has a par value of $1,000 and a coupon rate of 6 percent. What is the dollar amount of each semiannual interest payment if you own 6 of these bonds? 53. A bond has a par value of $1,000, a market price of $1,012, and a coupon rate of 5.75 percent. What is the current yield? 54. A 6.5 percent coupon bond has a face value of $1,000 and a current yield of 6.61 percent. What is the current market price?

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Business - General Business Week One Week 1 – DQ1 - Blume’s Formula, Allocation, and Selection From Chapter 1, answer Concept Question 5: What is Blume’s formula? When would you want to use it in practice? Also, from Chapter 2, answer Concept Question 4: What is the difference between asset allocation and security selection? Remember to complete all parts of the questions and support your answers with examples from the text and other resources. Week 1 – DQ2 - Money Market Funds From Chapter 4, complete Problem 4: The Aqua Liquid Assets Money Market Mutual Fund has a NAV of $1 per share. During the year, the assets held by this fund appreciated by 2.5 percent. If you had invested $50,000 in this fund at the start of the year, how many shares would you own at the end of the year? What will the NAV of this fund be at the end of the year? Why? Remember to complete all parts of the question, show your work, and report the results of your analysis. Assignment Week 1- Assignment - Annualized Returns – Chapter 3 problem 18 Complete problem 18 in Chapter 3 (shown below) and submit to the instructor. Show your work to find the annualized return for each of the listed share prices. Write a 100 word analysis of the process to calculate these annualized returns. Suppose you have $28,000 to invest. You’re considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $40 per share. You also notice that a call option with a $40 strike price and six months to maturity is available. The premium is $4.00. MMEE pays no dividends. What is your annualized return from these two investments if, in six months, MMEE is selling for $48 per share? What about $36 per share? Week Two Readings Chapter 5: The Stock Market Chapter 6: Common Stock Valuation Chapter 7: Stock Price Behavior and Market Efficiency Chapter 8: Behavioral Finance and the Psychology of Investing Discussions Week 2 – DQ1 - Primary and Secondary Markets Complete Concept Question 1 from Chapter 5: If you were to visit your local Chevrolet retailer, there is both a primary and a secondary market in action. Explain. Is the Chevy retailer a dealer or a broker? Remember to complete all parts of the question and support your answers with examples from the text and other resources. Week 2 – DQ2 - Contrarian Investing Complete Concept Question 9 from Chapter 8: What does it mean to be a contrarian investor? How would a contrarian investor use technical analysis? Post your answers to the discussion board. Remember to complete all parts of the question and support your answers with examples from the text and other resources. Assignment Week 2 – Assignment - Abbott Laboratories Problem After reading the Value Line figures and information on Abbott Laboratories in the Questions and Problems section of Chapter 6 (just before Problem 27), complete Problems 27, 28, 29, 30, and 31 and submit to your instructor. Show your calculations and in your response to problem 31 write a 100 to 200 word defense of your position as to the value of Abbott Laboratories stock at its current price of $50 per share. 27. What is the sustainable growth rate and required return for Abbott Laboratories? Using these values, calculate the 2010 share price of Abbott Laboratories Industries stock according to the constant dividend growth model. 28. Using the P/E, P/CF, and P/S ratios, estimate the 2010 share price for Abbott Laboratories. Use the average stock price each year to calculate the price ratios. 29. Assume the sustainable growth rate and required return you calculated in Problem 27 are valid. Use the clean surplus relationship to calculate the share price for Abbott Laboratories with the residual income model. 30. Use the information from the previous problem and calculate the stock price with the clean surplus dividend. Do you get the same stock price as in the previous problem? Why or why not? 31. Given your answers in the previous questions, do you feel Abbott Laboratories is overvalued or undervalued at its current price of around $50? At what price do you feel the stock should sell? Week Three Discussions Week 3 – DQ1 - Forward Interest Rates Complete Problem 16 from the Questions and Problems section of Chapter 9: According to the pure expectations theory of interest rates, how much do you expect to pay for a one-year STRIPS on February 15, 2011? What is the corresponding implied forward rate? How does your answer compare to the current yield on a one-year STRIPS? What does this tell you about the relationship between implied forward rates, the shape of the zero coupon yield curve, and market expectations about future spot interest rates? Remember to complete all parts of the questions, and report the results of your analysis. Week 3 – DQ2 - Bond Prices versus Yields Complete Concept Question 9 of Chapter 10: (a) What is the relationship between the price of a bond and its YTM? (b) Explain why some bonds sell at a premium to par value, and other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about discount bonds? For bonds selling at par value? (c) What is the relationship between the current yield and YTM for premium bonds? For discount bonds? For bonds selling at par value? Remember to complete all parts of the questions, and report the results of your analysis. Assignment Week 3 – Assignment – Bootstrapping Chapter 10 Problem 31 Complete problem 31 of Chapter 10 (shown below), and submit to your instructor. Show your calculations and the algebraic manipulation of the price equation for the bond. In addition to solving the problem, write a 100 to 200 word essay on the term structure of fixed income securities. One method used to obtain an estimate of the term structure of interest rates is called bootstrapping. Suppose you have a one-year zero coupon bond with a rate of r1 and a two-year bond with an annual coupon payment of C. To bootstrap the two-year rate, you can set up the following equation for the price (P) of the coupon bond: /(1+r_1 )+(C_2+Par value)/(1+r_2 )^2 Because you can observe all of the variables except r2, the spot rate for two years, you can solve for this interest rate. Suppose there is a zero coupon bond with one year to maturity that sells for $949 and a two-year bond with a 7.5 percent coupon paid annually that sells for $1,020. What is the interest rate for two years? Suppose a bond with three years until maturity and an 8.5 percent annual coupon sells for $1,029. What is the interest rate for three years? Week Four Discussions Week 4 – DQ1 – Expected Returns and Deviation Complete Problems 1, 2, and 3 from the Questions and Problems section of Chapter 11 (shown below). Remember to complete all parts of the questions, and report the results of your analysis. a. Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone. State of Economy Probability of State of the Economy Security Return if State Occurs Recession .30 -8% Normal .40 13 Boom .30 23 b. Using the information in the previous question, calculate the standard deviation of returns. c. Repeat Questions 1 2 assuming that all three states are equally likely. Week 4 – DQ2 – Portfolio Weights Complete Problem 10 from the Questions and Problems section of Chapter 12: A stock has a beta of .9 and an expected return of 9 percent. A risk-free asset currently earns 4 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of .5, what are the portfolio weights? c. If a portfolio of the two assets has an expected return of 8 percent, what is its beta? d. If a portfolio of the two assets has a beta of 1.80, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain. Assignment Week 4 – Assignment – Performance Metrics Chapter 13 Problem 22 Complete Problem 22 in the Questions and Problems section of Chapter 13 (shown below). When you pick the best choice for your portfolio, defend your decision in a 100 - 200 word essay. You have been given the following return information for two mutual funds (Papa and Mama), the market index, and the risk-free rate. Year Papa Fund Mama Fund Market Risk-Free 2008 -12.6% -22.6 -24.5% 1% 2009 25.4 18.5 19.5 3 2010 8.5 9.2 9.4 2 2011 15.5 8.5 7.6 4 2012 2.6 -1.2 -2.2 2 Calculate the Sharpe ratio, Treynor ratio, Jensen’s alpha, information ratio, and R-squared for both funds and determine which is the best choice for your portfolio. Week Five Discussions Week 5 – DQ1 – Hedging with Futures Complete Concept Question 7 from Chapter 14: The town of South Park is planning a bond issue in six months and Kenny, the town treasurer, is worried that interest rates may rise, thereby reducing the value of the bond issue. Should Kenny buy or sell Treasury bond futures contracts to hedge the impending bond issue? Remember to complete all parts of the question and support your answers with examples from the text and other resources. Week 5 – DQ2 – Option Strategies Complete Concept Question 12 from Chapter 15: Recall the options strategies of a protective put and covered call discussed in the text. Suppose you have sold short some shares of stock. Discuss analogous option strategies and how you would implement them. (Hint: They’re called protective calls and covered puts.) Remember to complete all parts of the question and support your answers with examples from the text and other resources. Final Project Week 5 – Final Project – Construct a well-diversified portfolio The student will construct a well-diversified portfolio using an initial investment stake of $50,000 (the portfolio should use 95% of the fund, but they may not use more than $50,000). The student may include stocks, common or preferred; bonds, corporate or U.S. Treasury bonds; mutual funds; and futures contract or options. The student will use the closing prices from the first day of the class to determine the price of each issue. Only whole lots of any issues may be acquired, that is no less than 100 shares of common or preferred stock; no less than 5 corporate bonds or $10,000 for U.S. Treasury Bonds; no fewer than the minimum required investment for any mutual fund; and no fewer than 5 contracts for any option or futures position. The settlement date will be the first day of Week 3. The student does not have to use all of the above mentioned securities, but they must use more than one class. Transaction costs are ignored in the creation of the portfolio.

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