# 2. What is your best estimate of what the price would be if the riskless interest rate was 9% (compounded semi-annually)? (1.04)

Save this PDF as:

Size: px
Start display at page:

Download "2. What is your best estimate of what the price would be if the riskless interest rate was 9% (compounded semi-annually)? (1.04)"

## Transcription

1 Lecture 4 1 Bond valuation Exercise 1. A Treasury bond has a coupon rate of 9%, a face value of \$1000 and matures 10 years from today. For a treasury bond the interest on the bond is paid in semi-annual installments. The current riskless interest rate is 12% (compounded semi-annually). 1. Suppose you purchase the Treasury bond described above and immediately thereafter the riskless interest rate falls to 8%. (compounded semi-annually). What would be the new market price of the bond? 2. What is your best estimate of what the price would be if the riskless interest rate was 9% (compounded semi-annually)? Solution to Exercise If the interest rate is 8%: [ ] 1 \$ \$1000 = \$ (1.04) If the interest rate is 9%: A quick calculation will verify that it is [ ] 1 \$ \$1000 = \$ (1.045) 20 Exercise 2. Suppose you are trying to determine the interest rate sensitivity of two bonds. Bond 1 is a 12% coupon bond with a 7-year maturity and a \$1000 principal. Bond 2 is a zero-coupon bond that pays \$1120 after 7 year. The current interest rate is 12%. 1. Determine the duration of each bond. 2. If the interest rate increases 100 basis points (100 basis points = 1%), what will be the capital loss on each bond? Solution to Exercise Duration Duration bond 1: Cash Flow PV(r=12%) Year Bond 1 Bond 2 Bond 1 Bond [ ] 1000 Duration bond 2: = 7 Bond 2 will be more sensitive to interest rate changes. =

2 2. If the interest rate increases 100 basis points to 13%, the new prices of each bond will be: Price Bond 1 = T \$120 (1.13) \$1000 t (1.13) = \$ Price Bond 2 = = Capital Loss Bond 1 = = Percentage Loss Bond 1 = = 4.423% Capital Loss Bond 2 = = Percentage Loss Bond 2 = = 6.032% Note: The percentage loss on each bond is approximately equal to Exercise 3. Percentage Loss Duration 1 r r Percentage Loss Bond = 4.563% 1.12 Percentage Loss Bond = 6.25% 1.12 A \$100, 10 year bond was issued 7 years ago at a 10% annual interest rate. The current interest rate is 9%. The current price of the bond is Use annual, discrete compounding. 1. Calculate the bonds yield to maturity. Solution to Exercise YTM: Calculate the internal rate of return on: Exercise 4. t = C t = IRR = = % A two-year Treasury bond with a face value of 1000 and an annual coupon payment of 8% sells for A one-year T bill, with a face value of 100, and no coupons, sells for 90. Compounding is discrete, annual. Given these market prices, 1. Find the prices d(0, 1) and d(0, 2) of one dollar received respectively one and two years from now. 2. Find the corresponding interest rates. Solution to Exercise Discount factors (prices): [ = d(0, 1)80 d(0, 2) = d(0, 1)100 d(0, 1) = = = d(0, 2) d(0, 2) = 1080 d(0.2) = Solving these equations we find prices [ ] d(0, 1) = 0.9 d(0, 2) = 0.84 ] 2

3 2. and interest rates [ r(0, 1) = 11% r(0, 2) = 9% >> B=[ ] B = >> C=[ ;100 0] C = >> d=inv(c)*b d = Exercise 5. ] Suppose you want to invest \$1000 for two years. The current term structure looks like the following: Year Spot rate 1 6 % 2 7 % 1. If you want to be certain of the amount you will have after two years, what is the amount you get in year 2? 2. Suppose you only invest for one year, and enter into a contract that guarantees the interest rate you will get one year from now, the forward rate. What must this forward rate be? Solution to Exercise 5. If you want to be certain of the amount you will have after two years you will have to lend at the two-year spot rate, r 2 = 7%. The amount you will have after two years is F V 2 = \$1000(1 r) 2 = \$ = \$1145 The rate at which you are implicitly agreeing to lend over the second year is the forward rate for year 2, f 2. This rate is: f 2 = (1 r2)2 (1 r 1) 1 = = 8% Thus, by buying a two-year pure discount bond, you are implicitly contracting to lend at an 8% interest rate in the second year. An alternative way to lend for two years is to buy a one-year pure discount bond yielding r 1 = 6% over the first year and rolling over into another one-year pure discount bond yielding 1 r 2 over the second year. This strategy is risky, however, since you do not know what 1 r 2 will be until the end of the first year. The expected amount you will have after two years is: Relationship: E[ F V 2] = \$1000(1 r(0, 1))(1 E[ r(1, 2)]) = \$ (1 E[ r(1, 2)]) E[ r(1, 2)] > f(0, 1, 2) = 8% E[ F V 2] > \$1145 E[ r(1, 2)] = f(0, 1, 2) = 8% E[ F V 2] = \$1145 E[ r(1, 2)] < f(0, 1, 2) = 8% E[ F V 2] < \$1145 3

4 2 Common Stock Valuation. Exercise 6. Expected return = Expected dividend yield Expected capital gain return. E[r] = E[D 1] E[P 1] In equilibrium, the price of the stock ( ) will adjust so that the expected return E[r] equals the required return of investors, r. The required return, r, is sometimes called the opportunity cost of capital or market capitalization rate. Show that this implies the following expression for the current stock price E[D t ] Solution to Exercise 6. Substituting r for E[r] in E[r] = E[D1] E[P1] P0 and rearranging yields an equation for today s price: E[D1] E[P1] 1 r The price one year from now, however, will be equal to P 1 = E[D2] E[P2] 1 r Substituting this expression into the expression for yields: E[D1] 1 r E[D2] E[P2] (1 r) 2 Repeating the process again, this time substituting for P 2, yields: E[D1] 1 r E[D2] E[D3] E[P3] (1 r) 2 (1 r) 3 Continuing in this fashion over and over produces the following valuation formula Exercise 7. E[D t] Consider the following valuation formula for stock prices: E[D t ] where is todays stock price, D t the dividend payment on date t, and r the required rate of return on the stock. Under what circumstances does this collapse into the valuation formula P o = D 1 r g 4

5 Solution to Exercise 7. When the dividend grows at at a rate g per period: D t = D 0(1 g) t then the Exercise 8. The common stock of the Handy Dandy Hardware store chain is currently selling for \$30 per share. Last year s dividend per share was \$4.00. Earnings and dividends per share are expected to grow at a constant rate of 5% per year for the indefinite future. 1. Estimate the market capitalization rate for Handy Dandy. 2. What is the expected price of the stock one year from now? 3. What are the expected dividend and capital gain returns over the next year? Solution to Exercise 8. E[D 1] = D 0(1 g) = \$ = 4.20 r = r = = 19% What is the expected price of the stock one year from now? There are different ways to think about this. One way is to realize that in expected terms the price should increase with the capitalization rate r, which gives E[P 1] = (1 r) = 35.7 This is the price before the stock pays dividend. If the dividend is 4.20, the ex-dividend price is expected to be = We can also find this by direct calculation of the value of the stock going forward E[P 1] = E[D2] r g E[D 2] = D 0(1 g) 2 = 4.00 (1.05) 2 = E[P 1] = = What are the expected dividend and capital gain returns over the next year? E[D 1] = = 14% E[P 1] = = 5% Exercise 9. The Handy Dandy Hardware Store chain is expected to benefit greatly from the recent interest in do-ityourself home repair. Analysts are forecasting that Handy Dandy will experience two years of abnormally high growth of 20% in earnings and dividends before settling down to a normal growth rate of 5% in year 3 and beyond. Last year s dividend per share was \$4.00. Assume that the appropriate opportunity cost of capital is 19%. 1. Determine the market price of Handy Dandy s common stock. 5

6 Solution to Exercise 9. E[D t] E[D1] E[D2] E[P2] (1 r) (1 r) 2 We need estimates of E[D 1], E[D 2] and E[P 2]. E[D 1] = = 4.80 E[D 2] = = 5.76 E[P 2] = E[D3] r g = = = (1.19) 2 6

### 7. Bonds and Interest rates

7. Bonds and Interest rates 1 2 Yields and rates I m thinking of buying a bond that has a face value of \$1000, pays semiannual coupons of \$40 and has 7 years to maturity. The market price is \$943. Fixed

### Overview of Lecture 5 (part of Lecture 4 in Reader book)

Overview of Lecture 5 (part of Lecture 4 in Reader book) Bond price listings and Yield to Maturity Treasury Bills Treasury Notes and Bonds Inflation, Real and Nominal Interest Rates M. Spiegel and R. Stanton,

### Introduction to Bond Valuation. Types of Bonds

Introduction to Bond Valuation (Text reference: Chapter 5 (Sections 5.1-5.3, Appendix)) Topics types of bonds valuation of bonds yield to maturity term structure of interest rates more about forward rates

### HEC Paris MBA Program. Financial Markets Prof. Laurent E. Calvet Fall 2010 MIDTERM EXAM. 90 minutes Open book

HEC Paris MBA Program Name:... Financial Markets Prof. Laurent E. Calvet Fall 2010 MIDTERM EXAM 90 minutes Open book The exam will be graded out of 100 points. Points for each question are shown in brackets.

### Chapter 8. Step 2: Find prices of the bonds today: n i PV FV PMT Result Coupon = 4% 29.5 5? 100 4 84.74 Zero coupon 29.5 5? 100 0 23.

Chapter 8 Bond Valuation with a Flat Term Structure 1. Suppose you want to know the price of a 10-year 7% coupon Treasury bond that pays interest annually. a. You have been told that the yield to maturity

### Financial Markets and Valuation - Tutorial 2: SOLUTIONS. Bonds, Stock Valuation & Capital Budgeting

Financial Markets and Valuation - Tutorial : SOLUTIONS Bonds, Stock Valuation & Capital Budgeting (*) denotes those problems to be covered in detail during the tutorial session Bonds Problem. (Ross, Westerfield

### Bonds and the Term Structure of Interest Rates: Pricing, Yields, and (No) Arbitrage

Prof. Alex Shapiro Lecture Notes 12 Bonds and the Term Structure of Interest Rates: Pricing, Yields, and (No) Arbitrage I. Readings and Suggested Practice Problems II. Bonds Prices and Yields (Revisited)

### Bonds, Preferred Stock, and Common Stock

Bonds, Preferred Stock, and Common Stock I. Bonds 1. An investor has a required rate of return of 4% on a 1-year discount bond with a \$100 face value. What is the most the investor would pay for 2. An

### Notes for Lecture 3 (February 14)

INTEREST RATES: The analysis of interest rates over time is complicated because rates are different for different maturities. Interest rate for borrowing money for the next 5 years is ambiguous, because

### M.I.T. Spring 1999 Sloan School of Management 15.415. First Half Summary

M.I.T. Spring 1999 Sloan School of Management 15.415 First Half Summary Present Values Basic Idea: We should discount future cash flows. The appropriate discount rate is the opportunity cost of capital.

### ECONOMICS 422 MIDTERM EXAM 1 R. W. Parks Autumn (30) Pandora lives in a two period Fisherian world. Her utility function for 2

NAME: ECONOMICS 422 MIDTERM EXAM 1 R. W. Parks Autumn 1994 Answer all questions on the examination sheets. Weights are given in parentheses. In general you should try to show your work. If you only present

Answers to End-of-Chapter Questions 1. The bond with a C rating should have a higher risk premium because it has a higher default risk, which reduces its demand and raises its interest rate relative to

### GESTÃO FINANCEIRA II PROBLEM SET 2 - SOLUTIONS

GESTÃO FINANCEIRA II PROBLEM SET - SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE 1 ST SEMESTER 010-011 Yield to Maturity Chapter 8 Valuing Bonds 8-3. The following

### 2. Futures and Forward Markets Pricing

2. Futures and Forward Markets 2.2. Pricing An Arbitrage Opportunity? Gold spot price: \$300 per oz Gold 1-year forward price: \$325 per oz Time-to-delivery: one year Rate of interest per annum (with annual

### CHAPTER 5 HOW TO VALUE STOCKS AND BONDS

CHAPTER 5 HOW TO VALUE STOCKS AND BONDS Answers to Concepts Review and Critical Thinking Questions 1. Bond issuers look at outstanding bonds of similar maturity and risk. The yields on such bonds are used

### Practice Questions for Midterm II

Finance 333 Investments Practice Questions for Midterm II Winter 2004 Professor Yan 1. The market portfolio has a beta of a. 0. *b. 1. c. -1. d. 0.5. By definition, the beta of the market portfolio is

### AFM 271 Practice Problem Set #1 Spring 2005

AFM 271 Practice Problem Set #1 Spring 2005 1. Text problems: Chapter 1 1, 3, 4 Chapter 2 5 Chapter 3 2, 6, 7 Chapter 4 2, 6, 12, 14, 16, 18, 20, 22, 24, 26, 30, 32, 34, 38, 40, 46, 48 Chapter 5 2, 4,

### CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES 1. Expectations hypothesis. The yields on long-term bonds are geometric averages of present and expected future short rates. An upward sloping curve is

### CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

Chapter - The Term Structure of Interest Rates CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

### CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER : THE TERM STRUCTURE OF INTEREST RATES CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

### Practice Set and Solutions #2

723G26/2012-10-10 Practice Set and Solutions #2 What to do with this practice set? Practice sets are handed out to help students master the material of the course and prepare for the final exam. These

### 2. Determine the appropriate discount rate based on the risk of the security

Fixed Income Instruments III Intro to the Valuation of Debt Securities LOS 64.a Explain the steps in the bond valuation process 1. Estimate the cash flows coupons and return of principal 2. Determine the

### Fixed Income: Practice Problems with Solutions

Fixed Income: Practice Problems with Solutions Directions: Unless otherwise stated, assume semi-annual payment on bonds.. A 6.0 percent bond matures in exactly 8 years and has a par value of 000 dollars.

### PRACTICE EXAMINATION NO. 5 May 2005 Course FM Examination. 1. Which of the following expressions does NOT represent a definition for a n

PRACTICE EXAMINATION NO. 5 May 2005 Course FM Examination 1. Which of the following expressions does NOT represent a definition for a n? A. v n ( 1 + i)n 1 i B. 1 vn i C. v + v 2 + + v n 1 vn D. v 1 v

### 1. Present Value. 2. Bonds. 3. Stocks

Stocks and Bonds 1. Present Value 2. Bonds 3. Stocks 1 Present Value = today s value of income at a future date Income at one future date value today of X dollars in one year V t = X t+1 (1 + i t ) where

### Chapter 4 Interest Rates. Options, Futures, and Other Derivatives 8th Edition, Copyright John C. Hull

Chapter 4 Interest Rates 1 Types of Rates Treasury rates LIBOR rates Repo rates 2 Treasury Rates Rates on instruments issued by a government in its own currency 3 LIBOR and LIBID LIBOR is the rate of interest

### Chapter 4 Interest Rates. Options, Futures, and Other Derivatives 9th Edition, Copyright John C. Hull

Chapter 4 Interest Rates 1 Types of Rates! Treasury rate! LIBOR! Fed funds rate! Repo rate 2 Treasury Rate! Rate on instrument issued by a government in its own currency 3 LIBOR! LIBOR is the rate of interest

### CHAPTER 8 INTEREST RATES AND BOND VALUATION

CHAPTER 8 INTEREST RATES AND BOND VALUATION Solutions to Questions and Problems 1. The price of a pure discount (zero coupon) bond is the present value of the par value. Remember, even though there are

### Problems and Solutions

Problems and Solutions CHAPTER Problems. Problems on onds Exercise. On /04/0, consider a fixed-coupon bond whose features are the following: face value: \$,000 coupon rate: 8% coupon frequency: semiannual

### FIN 472 Fixed-Income Securities Debt Instruments

FIN 472 Fixed-Income Securities Debt Instruments Professor Robert B.H. Hauswald Kogod School of Business, AU The Most Famous Bond? Bond finance raises the most money fixed income instruments types of bonds

### Chapter 6. Interest Rates And Bond Valuation. Learning Goals. Learning Goals (cont.)

Chapter 6 Interest Rates And Bond Valuation Learning Goals 1. Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. 2. Review the legal aspects of bond financing

### Yield Curve. Term Structure. Observed Yield Curves

Yield Curve The term structure refers to the relationship between short-term and long-term interest rates. The yield curve plots the yield to maturity against the term to maturity (figure 1). One plots

### Note: There are fewer problems in the actual Midterm Exam!

HEC Paris Practice Midterm Exam Questions Version with Solutions Financial Markets BS Fall 200 Note: There are fewer problems in the actual Midterm Exam! Problem. Is the following statement True, False

### This paper is not to be removed from the Examination Halls

~~FN3023 ZA d0 This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON FN3023 ZA BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences,

### CHAPTER 7 INTEREST RATES AND BOND VALUATION

CHAPTER 7 INTEREST RATES AND BOND VALUATION Answers to Concepts Review and Critical Thinking Questions 1. No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term Treasury

### Chapter 4 Valuing Bonds

Chapter 4 Valuing Bonds MULTIPLE CHOICE 1. A 15 year, 8%, \$1000 face value bond is currently trading at \$958. The yield to maturity of this bond must be a. less than 8%. b. equal to 8%. c. greater than

### Chapter Review Problems

Chapter Review Problems State all stock and bond prices in dollars and cents. Unit 14.1 Stocks 1. When a corporation earns a profit, the board of directors is obligated by law to immediately distribute

### Exercise 6 Find the annual interest rate if the amount after 6 years is 3 times bigger than the initial investment (3 cases).

Exercise 1 At what rate of simple interest will \$500 accumulate to \$615 in 2.5 years? In how many years will \$500 accumulate to \$630 at 7.8% simple interest? (9,2%,3 1 3 years) Exercise 2 It is known that

### Rate of Return. Reading: Veronesi, Chapter 7. Investment over a Holding Period

Rate of Return Reading: Veronesi, Chapter 7 Investment over a Holding Period Consider an investment in any asset over a holding period from time 0 to time T. Suppose the amount invested at time 0 is P

### Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates

Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates Cash Flow Financial transactions and investment opportunities are described by cash flows they generate. Cash flow: payment

### Finding the Payment \$20,000 = C[1 1 / 1.0066667 48 ] /.0066667 C = \$488.26

Quick Quiz: Part 2 You know the payment amount for a loan and you want to know how much was borrowed. Do you compute a present value or a future value? You want to receive \$5,000 per month in retirement.

### Estimating Risk free Rates. Aswath Damodaran. Stern School of Business. 44 West Fourth Street. New York, NY 10012. Adamodar@stern.nyu.

Estimating Risk free Rates Aswath Damodaran Stern School of Business 44 West Fourth Street New York, NY 10012 Adamodar@stern.nyu.edu Estimating Risk free Rates Models of risk and return in finance start

### You just paid \$350,000 for a policy that will pay you and your heirs \$12,000 a year forever. What rate of return are you earning on this policy?

1 You estimate that you will have \$24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each

### Chapter 11. Bond Pricing - 1. Bond Valuation: Part I. Several Assumptions: To simplify the analysis, we make the following assumptions.

Bond Pricing - 1 Chapter 11 Several Assumptions: To simplify the analysis, we make the following assumptions. 1. The coupon payments are made every six months. 2. The next coupon payment for the bond is

### Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator

University of Stavanger (UiS) Stavanger Masters Program Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator The number in brackets is the weight for each problem. The weights

### The Term Structure of Interest Rates CHAPTER 13

The Term Structure of Interest Rates CHAPTER 13 Chapter Summary Objective: To explore the pattern of interest rates for different-term assets. The term structure under certainty Forward rates Theories

### Coupon Bonds and Zeroes

Coupon Bonds and Zeroes Concepts and Buzzwords Coupon bonds Zero-coupon bonds Bond replication No-arbitrage price relationships Zero rates Zeroes STRIPS Dedication Implied zeroes Semi-annual compounding

### Waiting to Extend: A Forward-Looking Approach to Fixed Income Investing

Waiting to Extend: A Forward-Looking Approach to Fixed Income Investing Market Commentary May 2016 Investors sometimes want to invest with a money manager who will shorten portfolio duration in advance

### FNCE 301, Financial Management H Guy Williams, 2006

REVIEW We ve used the DCF method to find present value. We also know shortcut methods to solve these problems such as perpetuity present value = C/r. These tools allow us to value any cash flow including

### Practice Set #2 and Solutions.

FIN-672 Securities Analysis & Portfolio Management Professor Michel A. Robe Practice Set #2 and Solutions. What to do with this practice set? To help MBA students prepare for the assignment and the exams,

### CIS September 2012 Exam Diet. Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis

CIS September 2012 Exam Diet Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis Corporate Finance (1 13) 1. Assume a firm issues N1 billion in debt

### Bond Valuation. Capital Budgeting and Corporate Objectives

Bond Valuation Capital Budgeting and Corporate Objectives Professor Ron Kaniel Simon School of Business University of Rochester 1 Bond Valuation An Overview Introduction to bonds and bond markets» What

### Solutions 2. 1. For the benchmark maturity sectors in the United States Treasury bill markets,

FIN 472 Professor Robert Hauswald Fixed-Income Securities Kogod School of Business, AU Solutions 2 1. For the benchmark maturity sectors in the United States Treasury bill markets, Bloomberg reported the

### Chapter 3 Fixed Income Securities

Chapter 3 Fixed Income Securities Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Fixed-income securities. Stocks. Real assets (capital budgeting). Part C Determination

### t = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3

MØA 155 PROBLEM SET: Summarizing Exercise 1. Present Value [3] You are given the following prices P t today for receiving risk free payments t periods from now. t = 1 2 3 P t = 0.95 0.9 0.85 1. Calculate

### Bond Valuation. What is a bond?

Lecture: III 1 What is a bond? Bond Valuation When a corporation wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities called bonds. A bond

### Exam 1 Morning Session

91. A high yield bond fund states that through active management, the fund s return has outperformed an index of Treasury securities by 4% on average over the past five years. As a performance benchmark

### Determination of Forward and Futures Prices

Determination of Forward and Futures Prices Chapter 5 5.1 Consumption vs Investment Assets Investment assets are assets held by significant numbers of people purely for investment purposes (Examples: gold,

### Chapter Nine Selected Solutions

Chapter Nine Selected Solutions 1. What is the difference between book value accounting and market value accounting? How do interest rate changes affect the value of bank assets and liabilities under the

### LOS 56.a: Explain steps in the bond valuation process.

The following is a review of the Analysis of Fixed Income Investments principles designed to address the learning outcome statements set forth by CFA Institute. This topic is also covered in: Introduction

### Bond Valuation. FINANCE 350 Global Financial Management. Professor Alon Brav Fuqua School of Business Duke University. Bond Valuation: An Overview

Bond Valuation FINANCE 350 Global Financial Management Professor Alon Brav Fuqua School of Business Duke University 1 Bond Valuation: An Overview Bond Markets What are they? How big? How important? Valuation

### Bond Price Volatility. c 2008 Prof. Yuh-Dauh Lyuu, National Taiwan University Page 71

Bond Price Volatility c 2008 Prof. Yuh-Dauh Lyuu, National Taiwan University Page 71 Well, Beethoven, what is this? Attributed to Prince Anton Esterházy c 2008 Prof. Yuh-Dauh Lyuu, National Taiwan University

### Forward pricing. Assets with no cash flows Assets with know discrete cash flows Assets with continuous cash flows (index)

Forward pricing Assets with no cash flows Assets with know discrete cash flows Assets with continuous cash flows (index) Finance 7523 Spring 1999 Assistant Professor Steven C. Mann Neeley School, TCU Forward

### The Time Value of Money

The Time Value of Money This handout is an overview of the basic tools and concepts needed for this corporate nance course. Proofs and explanations are given in order to facilitate your understanding and

### FIN 472 Fixed-Income Securities Forward Rates

FIN 472 Fixed-Income Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU Interest-Rate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward

### Caput Derivatives: October 30, 2003

Caput Derivatives: October 30, 2003 Exam + Answers Total time: 2 hours and 30 minutes. Note 1: You are allowed to use books, course notes, and a calculator. Question 1. [20 points] Consider an investor

### Fixed Income Securities

3st lecture IES, UK October 7, 2015 Outline Bond Characteristics 1 Bond Characteristics 2 Bond Characteristics Government bond listing Rate Maturity mo/yr Bid Asked Chg Ask yld 3.000 July 12 108:22 108:23-20

### Money Market and Debt Instruments

Prof. Alex Shapiro Lecture Notes 3 Money Market and Debt Instruments I. Readings and Suggested Practice Problems II. Bid and Ask III. Money Market IV. Long Term Credit Markets V. Additional Readings Buzz

### 15.407 Sample Mid-Term Examination Fall 2008. Some Useful Formulas

15.407 Sample Mid-Term Examination Fall 2008 Please check to be certain that your copy of this examination contains 18 pages (including this one). Write your name and MIT ID number on every page. You are

### CFA Level -2 Derivatives - I

CFA Level -2 Derivatives - I EduPristine www.edupristine.com Agenda Forwards Markets and Contracts Future Markets and Contracts Option Markets and Contracts 1 Forwards Markets and Contracts 2 Pricing and

### Yield Measures, Spot Rates & Forward Rates

Fixed Income Yield Measures, Spot Rates & Forward Rates Reading - 57 www.proschoolonline.com/ 1 Sources of Return Coupon interest payment: Periodic coupon interest is paid on the par value of the bond

### Maturity and interest-rate risk

Interest rate risk, page 1 Maturity and interest-rate risk Suppose you buy one of these three bonds, originally selling at a yield to maturity of 8 percent. Yield to One-year 30-year 30-year maturity 8%

### SAMPLE MID-TERM QUESTIONS

SAMPLE MID-TERM QUESTIONS William L. Silber HOW TO PREPARE FOR THE MID- TERM: 1. Study in a group 2. Review the concept questions in the Before and After book 3. When you review the questions listed below,

### Chapter 6 APPENDIX B. The Yield Curve and the Law of One Price. Valuing a Coupon Bond with Zero-Coupon Prices

196 Part Interest Rates and Valuing Cash Flows Chapter 6 APPENDIX B The Yield Curve and the Law of One Price Thus far, we have focused on the relationship between the price of an individual bond and its

### C(t) (1 + y) 4. t=1. For the 4 year bond considered above, assume that the price today is 900\$. The yield to maturity will then be the y that solves

Economics 7344, Spring 2013 Bent E. Sørensen INTEREST RATE THEORY We will cover fixed income securities. The major categories of long-term fixed income securities are federal government bonds, corporate

### VALUATION OF DEBT CONTRACTS AND THEIR PRICE VOLATILITY CHARACTERISTICS QUESTIONS See answers below

VALUATION OF DEBT CONTRACTS AND THEIR PRICE VOLATILITY CHARACTERISTICS QUESTIONS See answers below 1. Determine the value of the following risk-free debt instrument, which promises to make the respective

Review for Exam 1 Instructions: Please read carefully The exam will have 20 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

### Untangling F9 terminology

Untangling F9 terminology Welcome! This is not a textbook and we are certainly not trying to replace yours! However, we do know that some students find some of the terminology used in F9 difficult to understand.

### Key Concepts and Skills Chapter 8 Stock Valuation

Key Concepts and Skills Chapter 8 Stock Valuation Konan Chan Financial Management, Spring 2016 Understand how stock prices depend on future dividends and dividend growth Be able to compute stock prices

### Chapter 5 Financial Forwards and Futures

Chapter 5 Financial Forwards and Futures Question 5.1. Four different ways to sell a share of stock that has a price S(0) at time 0. Question 5.2. Description Get Paid at Lose Ownership of Receive Payment

### BUSINESS FINANCE (FIN 312) Spring 2009

BUSINESS FINANCE (FIN 31) Spring 009 Assignment Instructions: please read carefully You can either do the assignment by yourself or work in a group of no more than two. You should show your work how to

### FIN 3710. First (Practice) Midterm Exam 03/09/06

FIN 3710 Investment Analysis Zicklin School of Business Baruch College Spring 2006 FIN 3710 First (Practice) Midterm Exam 03/09/06 NAME: (Please print your name here) PLEDGE: (Sign your name here) Instructions:

Chapter Bond Prices and Yields McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Bond Prices and Yields Our goal in this chapter is to understand the relationship

Review for Exam 2 Instructions: Please read carefully The exam will have 20 multiple choice questions and 4 work problems. Questions in the multiple choice section will be either concept or calculation

### Chapter. Discounted Cash Flow Valuation. CORPRATE FINANCE FUNDAMENTALS by Ross, Westerfield & Jordan CIG.

Chapter 6 Discounted Cash Flow Valuation CORPRATE FINANCE FUNDAMENTALS by Ross, Westerfield & Jordan CIG. Key Concepts and Skills Be able to compute the future value of multiple cash flows Be able to compute

### The Term Structure of Interest Rates, Spot Rates, and Yield to Maturity

Chapter 5 How to Value Bonds and Stocks 5A-1 Appendix 5A The Term Structure of Interest Rates, Spot Rates, and Yield to Maturity In the main body of this chapter, we have assumed that the interest rate

### CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING

CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING Answers to Concepts Review and Critical Thinking Questions 1. No. The cost of capital depends on the risk of the project, not the source of the money.

### Key Concepts and Skills

Chapter 10 Some Lessons from Capital Market History Key Concepts and Skills Know how to calculate the return on an investment Understand the historical returns on various types of investments Understand

### Solutions to Practice Questions (Bonds)

Fuqua Business School Duke University FIN 350 Global Financial Management Solutions to Practice Questions (Bonds). These practice questions are a suplement to the problem sets, and are intended for those

### LO.a: Interpret interest rates as required rates of return, discount rates, or opportunity costs.

LO.a: Interpret interest rates as required rates of return, discount rates, or opportunity costs. 1. The minimum rate of return that an investor must receive in order to invest in a project is most likely

### Chapter 6 Interest Rates and Bond Valuation

Chapter 6 Interest Rates and Bond Valuation Solutions to Problems P6-1. P6-2. LG 1: Interest Rate Fundamentals: The Real Rate of Return Basic Real rate of return = 5.5% 2.0% = 3.5% LG 1: Real Rate of Interest

### Financial-Institutions Management. Solutions 1. 6. A financial institution has the following market value balance sheet structure:

FIN 683 Professor Robert Hauswald Financial-Institutions Management Kogod School of Business, AU Solutions 1 Chapter 7: Bank Risks - Interest Rate Risks 6. A financial institution has the following market

### Fixed Income Knowledge Series 2. Characteristics and Pricing of Government Bonds

Fixed Income Knowledge Series 2 Characteristics and Pricing of Government Bonds Government bonds are fixed income securities issued by the Government of India (GOI). The total outstanding bonds issued

### BF 6701 : Financial Management Comprehensive Examination Guideline

BF 6701 : Financial Management Comprehensive Examination Guideline 1) There will be 5 essay questions and 5 calculation questions to be completed in 1-hour exam. 2) The topics included in those essay and

### Readings and Learning Outcome Statements Study Session 16 Derivative Investments: Forwards and Futures... 9

Book 5 Derivatives and Portfolio Management Readings and Learning Outcome Statements... 3 Study Session 16 Derivative Investments: Forwards and Futures... 9 Study Session 17 Derivative Investments: Options,

### Section 5.1 Simple Interest and Discount

Section 5.1 Simple Interest and Discount DEFINITION: Interest is the fee paid to use someone else s money. Interest on loans of a year or less is frequently calculated as simple interest, which is paid

### FNCE 301, Financial Management H Guy Williams, 2006

Stock Valuation Stock characteristics Stocks are the other major traded security (stocks & bonds). Options are another traded security but not as big as these two. - Ownership Stockholders are the owner