fall16q01

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Finance

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Nov 24, 2024

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FIRST QUIZ FNCE 238/738 September 14, 2016 WRITE ALL ANSWERS ON THE TEST. IF YOUR ANSWER CONTINUES ON THE BACK, MAKE A NOTE OF IT ON THE FRONT. 45 PTS / 25 MINUTES NAME:_____________________________________________ SECTION (12, 1:30 or 3):__________________________________
1. (20 pts total) [ don’t worry about accrued interest for this question ] In August, Verizon issued a note with a 2.625% coupon, $2.25 Billion face value, maturing 8/15/26. On September 13, 2016, this note was trading at 97.275 bid, 97.893 asked. Suppose Verizon wanted to defease this note, which means to purchase a portfolio of Treasury securities that replicates the cash flows of its own note, and then arrange for the cash flows from the portfolio to pay off the note. Here are the contemporaneous quotes for two Treasury securities maturing on the same date: maturity coupon bid ask ask yield August 15, 2026 1.50% 97.984 98.000 1.72% August 15, 2026 6.75% 146.359 146.422 1.65% a. (5 pts) What is the portfolio of the Treasury securities that exactly replicates the cash flows of $100 principal amount of the Verizon security? b. (5 pts) How much would it cost Verizon to defease this $2.25 Billion note?
c. (5 pts) Which would you expect to have the higher dollar duration (i.e. DV01), the 1.5% security or the 6.75% security? Explain (briefly) d. (5 pts) The yield to maturity of the 1.50% security is higher than the yield to maturity of the 6.75% security. Briefly, what exactly does it mean for the yield to maturity of one security to be higher than the yield to maturity of another?
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2. (10 pts total) Suppose you buy $100MM principal amount of the Verizon note from question 1, and you want to finance this purchase. a. (5 pts) The standard margin for repo of an investment-grade corporate like this note is 5%. At these terms, how many dollars would you have to come up with yourself for the purchase, rather than borrow in the repo market? b. (5 pts) In words, what is the exposure of your repo counterparty to changes in the Verizon bond’s yield? Explain (briefly)
3. (15 pts total) From a 6/28 speech by SEC chief of staff Andrew Donohue In 2010, for example, the Commission adopted the first set of pivotal reforms that reduced money market funds’ credit risk exposure, required liquidity buffers, and increased disclosure to the Commission and to investors, among other things. Four years later, the Commission adopted structural and operational reforms to address risks of investor runs in money market funds, while preserving the benefits of the funds and supporting capital formation. Among other things, those reforms require a floating net asset value (NAV) for institutional prime money market funds, and provide non-government money market fund boards new tools – liquidity fees and redemption gates – to address runs. Can these reforms and tools deter money-fund runs from starting? Explain.