9. Read the following sentences and answer the questions. Company A plans to carry out $1 million in 1.5 years. Since this company is exposed to changes in the won-dollar exchange rate, it is trying to calculate the risk by applying the variance covariance method. The dollar-free coupons traded in the market have only one- year maturity and two-year maturity, and the yield of each bond is 5% and 6%. The annual volatility of the two bonds was 0.5% and 0.7%, respectively, and the correlation was estimated to be 0.80. 1) When 1 million dollars are mapped to two bond periods, find the present value of each 2) If a normal distribution is assumed under the 95% confidence level, find the non-variance VaRturncliversified Va) of the above position. 3) If a normal distribution is assumed under the 95% confidence level, find the diversified VaR (VaR) of the above position.

9. Read the following sentences and answer the questions. Company A plans to carry out $1 million in 1.5 years. Since this company is exposed to changes in the won-dollar exchange rate, it is trying to calculate the risk by applying the variance covariance method. The dollar-free coupons traded in the market have only one- year maturity and two-year maturity, and the yield of each bond is 5% and 6%. The annual volatility of the two bonds was 0.5% and 0.7%, respectively, and the correlation was estimated to be 0.80. 1) When 1 million dollars are mapped to two bond periods, find the present value of each 2) If a normal distribution is assumed under the 95% confidence level, find the non-variance VaRturncliversified Va) of the above position. 3) If a normal distribution is assumed under the 95% confidence level, find the diversified VaR (VaR) of the above position.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Derive the probability distribution of the 1-year HPR on a 30-year U.S. Treasury bond with a 4.0% coupon if it is currently selling at par and the probability distribution of its yield to maturity a year from now is as shown in the table below. (Assume the entire 4.0% coupon is paid at the end of the year rather than every 6 months. Assume a par value of $100.) Note: Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places. Economy Boom Normal Growth Recession Probability 0.35 0.40 0.25 YTM 11.0% 9.0 % 7.0 % Price Capital Gain Coupon Interest HPR % % %
An insurance company must make payments to a customer of $10 million in one year and $5 million in five years. The yield curve is flat at 10%. Required: a. If it wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon bond, what maturity bond must it purchase? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. What must be the face value and market value of that zero-coupon bond? Note: Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. a. Maturity of zero coupon bond b. Face value b. Market value years million million
Use the following forecasted financials: (Certain cells were left intentionally blank by asker) You may need to use the CAPM model. Assume beta equals 1.09, the risk-free rate is 1.62%, and the market risk premium is 4.72%. d) Calculate the terminal value and the present value of the terminal value. Assume a long-term growth rate of 3%. e) Calculate Sherwin Williams value per share. The company has 263.3 million shares outstanding.
Suppose the real risk-free rate of interest is r=4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per year for the next two years and 3.90% per year for the next three years. The maturity risk premium is 0.1 x (t-1) %, where t is number of years to maturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40%, The average inflation during the first 4 years is What is the yield on a 4-year Treasury bond? O 6.75% O 8.90% O 4.30% O 7.05% What is the yield on a 4-year BBB-rated bond? O 7.50% O 7.05 % O 8.45% 8.90% If the yield on a 5-year Treasury bond is 7.38% and the yield on a 6-year Treasury bond is 7.83%, the expected inflation in 6 years is (Hint: Do not round intermediate calculations.)
3b. You read in the Wall Street Journal that 30-day treasury bills are currently yielding 8%. You are informed by a broker the following estimates of current interest rate premium: . Inflation premium = 5% • Liquidity premium = 1% Maturity risk premium = 2% Default risk premium = 2% Disregard cross product terms, i.e., if averaging is required, use the arithmetic average. On the basis of these data, what is the real risk-free rate of return.
Recall that on a one-year Treasury security the yield is 5.6100% and 6.7320% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.15%. What is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) a 9.6049% b 6.4285% c 8.6217% d 7.5629% Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market’s estimate of the three-year Treasury rate two years from now? (Note: Do not round your intermediate calculations.) a 5.46% b 6.45% c 6.53% d 6.61%
20. Your assistant gathered the following financial data for Japan: The real risk-free rate is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. What is the required return on 2-year Treasury bond securities? Since the maturity is only 2 years we will assume that no premium should be required for the maturity risk. a) 6% b) 8% c) 6.33% O d) 8.33% e) None of the above
(Expected rate of return and risk) B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 4.6 percent. Calculate the investment's expected return and its standard deviation. Should Gautney invest in this security? Return -4% 1% 6% 0.05 8% (Click on the icon in order to copy its contents into a spreadsheet.) Probability 0.05 0.35 0.55 a. The investment's expected return is 3.85%. (Round to two decimal places.) b. The investment's standard deviation is%. (Round to two decimal places.) C
Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. Corporate Bond Yield Rate Spread = DRP + LP U.S. Treasury 0.73 % — AAA corporate 0.93 0.20 % AA corporate 1.33 0.60 A corporate 1.75 1.02 What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: 6.553%----->correct 7-year Corporate yield: ? %…
Recall that on a one-year Treasury security the yield is 4.0000% and 5.4000% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.4%. What is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) 6.8509% 6.0096% 7.6322% 5.1082%
An investor in Treasury securities expects inflation to be 2.1% in Year 1, 3.0% in Year 2, and 4.25% each year thereafter. Assume that the real risk-free rate is 2.25% and that this rate will remain constant. Three-year Treasury securities yield 5.20%, while 5-year Treasury securities yield 6.00%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP5 - MRP3? Do not round intermediate calculations. Round your answer to two decimal places.
The total market value of the equity of Okefenokee Condos is $3 million, and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock currently is 1.1 and that the expected risk premium on the market is 10%. The Treasury bill rate is 5%, and investors believe that Okefenokee's debt is essentially free of default risk. a. What is the required rate of return on Okefenokee stock? Note: Do not round intermediate calculations. Enter your answer as a whole percent. b. Estimate the WACC assuming a tax rate of 21%. Note: (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. Estimate the discount rate for an expansion of the company's present business. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. d. Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is 1.3.…

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