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UCCS / Finance / FNCE 3050 / A band issued on 12/1/1996 will mature on 12/1/2096. today is 12/1/200

A band issued on 12/1/1996 will mature on 12/1/2096. today is 12/1/200

A band issued on 12/1/1996 will mature on 12/1/2096. today is 12/1/200

Description

School: University of Colorado Colorado Springs
Department: Finance
Course: Basic Finance
Professor: Gordan stringer
Term: Spring 2016
Tags: Basic Finance
Cost: 50
Name: Midterm 2 Notes: Questions and Answers with Formulas
Description: Basic finance study guide/notes
Uploaded: 04/11/2016
16 Pages 53 Views 2 Unlocks
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CHAPTER 6We also discuss several other topics like Who is the director of the fsa?

UNDERSTANDING FINANCIAL MARKETS AND INSTITUTIONS

Q1. A particular security’s default risk premium is 2%. For all securities, the inflation risk premium is 1.75% and the real interest rate is 3.5%. The security’s liquidity risk premium is 0.25% and maturity risk premium is 0.85%. The security has no special covenants. Calculate the security’s equilibrium rate of returnWe also discuss several other topics like Why is journalism special?

Answer: R.R = 8.35%

              If = f (IP,RIR,DRP, LRP)

             ef = (1.75 + 3.5 + 2 + 0.25 + 0.85) = 8.35%

We also discuss several other topics like What are the specific tests for aluminum?

Q2. You are considering an investment in 30 years bonds issued by Moore Corporation. The bands have no special covenant. The WST report that one year T-bills are currently earning 3.25%. Your broker has determined the following information about economic activity and Moore Corporation bonds:

Real interest rate: 2.25%

Default risk premium: 1.15 %

Liquidity risk premium: 0.50 %Don't forget about the age old question of What is halogenation?

Maturity risk premium: 1.75%

Don't forget about the age old question of What is logrolling? why does it occur?

What is the inflation premium and what is the fair interest rate on Moore Corporation 30 year bonds?We also discuss several other topics like Who is the founder of the welfare party?

Answer: a) Inflation premium = 1%

              b) fair interest rate = 6.65%

             

               Inflation premium = c- RIR

                                3.25 - 2.25 = 1

CF = 1 + 2.25 + 1. 15 + .5 + 1.75 = 6. 65

Q3. Colorado Corporation 15 year bonds have an equilibrium rate of return of 8%. For all securities, the inflation risk premium is 1.75% and the real interest rate is 3.5%. The security’s liquidity risk premium is 0.25% and the maturity risk premium is 0.85%. No special covenants. Calculate the bond’s default risk premium

Answer: 8.06% = 1.75 + 3.5 + DRP + 0.25 + 0.85

              DRP: 8- (1.25 + 3.5 + .25 + .85) = 1.65

DRP = 1.65%

             

Q4. A two year Treasury security currently earns 4.14%. Over the next two years, the real interest rate is expected to be 2.25% per year and the inflation premium is expected to be 1.75% per year. Calculate the maturity risk premium on the 2 year Treasury security.

Answer: MRP = 0.14%

              4.14 = 1.75 + 2.25 + 0 + 0 + MP

Q5: Suppose that the current one year rate and expected one year treasury bill rates over the next 3 years as follows

Use the unbiased expectations theory to calculate the current (long term) rates for one, two three, and four year maturity. Treasury securities.

 

A.

Q6. One-year Treasury bills currently earn 3.45%. You expected that one year from now, one year Treasury bill rates will increase to 3.65%. If the unbiased theory is correct what should the current rate be on 2 year Treasury securities?

A.

Q7. Same as Q6 but solve using liquidity theory. Liquidity premium on 2 year securities is 0.05%

A.

Q8. Based on economist’s forecasts and analysis, one year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:

Use the liquidity premium hypothesis and calculate the current yield for each of the first four years .

Q9. The  Wall Street Journal reports that the rate on 3 year Treasury securities is 6%, and the 6 year Treasury rate is 6.2% from discussions with your broker, you have determined that the expected inflation premium is 2.25 % next year, 2.5% in year 2 and 2.6% in year 3 and beyond. Further , you expect that real interest rates will be 3.4% annually for the foreseeable future

  1. Calculate the maturity risk premium on the 3 year Treasury security
  2. Calculate the maturity risk premium on the 6 year Treasury security

A.

Q10. Jon B’s Corporations 10, 10 year bonds are currently yielding a return of 8.15 percent. The expected inflation premium is 2.5% annually and the real interest rate is expected to be 3.10% annually over the next 10 years. The liquidity risk premium on Jon B’s bonds on 0.25%. The maturity risk premium is 0.10% on 2 year securities and increases by 0.05% for each additional year to maturity. Calculate the default risk premium on Jon B’s 10 year bonds

CHAPTER 7: VALUING BONDS

Q1. Interest payment on 3 bonds ($1000 per value)

  • 4.2% capen corporate bond (semi)
  • 4.85% Treasury note
  • Corporate zero coupon bond/15 years maturity

Q2. A bond issued on 12/1/1996 will mature on 12/1/2096. Today is 12/1/2003, what is the bond’s time to maturity?

  2096    -   2003: 93 years

  (Future)   Present

Q3. 5 % Corporate bond is collided in 10 years for a call premium of 1 year of coupon payments. Per value is $1000, what is the price paid to the bondholder if the issuer calls the bond?

1000 x .05 + 1000 = $1050

Q4. A 3.265 TIP has an original reference CPI of 180.9. Current CPI is 207.2, what is per value and current interest payment of the TIPS?

Per value= 207.2/180.9 x 1000 = $1145.38

Interest Payment = ½ x .3625 x 1145.38= $20.76

Q5. 3 Bond quotes: Treasury bond quotes at 105.15, corporate bond quotes at 96.20, and a municipal bond quoted at 100.60. Treasury and corporate bonds have a par value of $1000 and the municipal has a par value of $5000, what is the price of the bonds in dollars?

Treasury Note: (105 + 15/32) x 1000 = 1054.69

Corporate Bond: .9620 x 1000 =962

Municipal Bond: 1.006 x 5000 x 5030

Q6. Calculate the price of a zero coupon bond that matures in 14 years, if the market interest rold is 6.10%

Q7. What is the current yield of a 5.4% coupon bond corporate bond quotes at 96.98?

Q8 What is the taxable equivalent on a m. bond with a yield to mature of 3.6% for an investor in the 28 percent marginal tax bracket?

Q9 Rank bond from lowest credit risk to highest credit risk all with the same time to maturity, by their yield to maturity

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