An investor borrows a principal of £1,000,000 and agrees to an interest-only repayment at a rate of 5% p.a., in equal quarterly installments, paid in arrears for 10 years. After 10 years the principal is paid back with a lump payment. The investor uses part of the principal to buy £200,000 nominal of 10-year government bonds, paying semi-annual coupons at a rate of 4% p.a. and producing a yield of 3.5% p.a. effective. Bonds are redeemed at par after 10 years. The remaining portion of the principal (denoted by P) is used to purchase properties that produce annual rental income at a rate of 4% of their initial value P for the first 5 years and, subsequently, at a rate of 5% of their initial value P. Rent is payable monthly in advance. (a) Evaluate the present value at time zero of the total liability. Let ir = 4% p.a. be the annual effective rate applied to liabilities. (b) Compute the present value at time zero of the portion of principal invected in bends and deduce the invectment in pronertios P

An investor borrows a principal of £1,000,000 and agrees to an interest-only repayment at a rate of 5% p.a., in equal quarterly installments, paid in arrears for 10 years. After 10 years the principal is paid back with a lump payment. The investor uses part of the principal to buy £200,000 nominal of 10-year government bonds, paying semi-annual coupons at a rate of 4% p.a. and producing a yield of 3.5% p.a. effective. Bonds are redeemed at par after 10 years. The remaining portion of the principal (denoted by P) is used to purchase properties that produce annual rental income at a rate of 4% of their initial value P for the first 5 years and, subsequently, at a rate of 5% of their initial value P. Rent is payable monthly in advance. (a) Evaluate the present value at time zero of the total liability. Let ir = 4% p.a. be the annual effective rate applied to liabilities. (b) Compute the present value at time zero of the portion of principal invected in bends and deduce the invectment in pronertios P

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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Zee Ltd has a 3 million dollar floating rate loan which is re-set every six months. The company wants to protect itself against a rising interest rate in the next six months. It purchases a 3% 6 v/s 12 Forward Rate Agreement ( FRA ) on a notional amount of 3 million dollar. At the start date of the FRA, the market interest rate on floating rate debt is 3.5 % per annum. (i) Calculate the interest payable by Zee Ltd to the providers of finance at the end of month 12. (ii) Calculate the actual interest cost of the loan and justify your answer.
A client deposits 150,000 in a bank, with the bank agreeing to pay 6% annual effective for three years. The client indicates that one third of the account balance will be withdrawn at the end of the first year and half of the account balance will be withdrawn at the end of the second year. The bank can invest in either one year or three year zero coupon bonds. The one year bonds yield 7% and the three year bonds yield 10%. Develop an investment program based on immunization.
Mathias purchases a 10-year CD for $10000 with 2.8% APR compounded monthly, and a 10-year bond for $10000 with a 3.3% coupon rate, paid annually. How much will Mathias’s original $20000 investment be worth at the end of the 10 years? Round your answer to the nearest cent.
A $10,000, 10-year corporate bond is offered at a premium for $11,000. The bond rate is 10% 6) per year compounded quarterly. If John wishes to earn 8% per year compounded quarterly on the bond investment, should he purchase the bond assuming he keeps the bond till it matures and then redeems it at face value? Explain. Show all work.
An obligation of £6,000 ostensible is redeemable at 109% on any coupon installment date somewhere in the range of 11 and 23 years from the date of isssue. The bond pays coupons of 8.2% per annum quarterly financially past due.Work out, to 2 decimal places, the with-profit cost one month after issue that ought to be paid by a financial backer at risk to 23% personal expense wishing to accomplish a compelling yearly yield of 2.7%.
A borrower has the option of accepting a fixed rate loan for five years at 10% or a floating rate loan of LIBOR plus 3%. Assume the current LIBOR rate is 6%. If the floating rate loan was chosen, did the borrower make the right decision if the LIBOR rates at the beginning of the next four years are 6.5%, 7.0%, 7.5%, and 7.75%? Note that the LIBOR rate at the beginning of the year is used to determine the payment at the end of the year.
Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $31,950,000, with the promise to buy them back at a price of $32,000,000. a. Calculate the yield on the repo if it has a 5-day maturity. b. Calculate the yield on the repo if it has a 15-day maturity. (For all requirements, use 360 days in a year. Do not round intermediate calculations. Round your percentage answers to 5 decimal places. (e.g., 32.16161)) a. b. X Answer is complete but not entirely correct. Yield on the repo Yield on the repo 1.02857 % 0.34286 %
Ten bonds are purchased for $9,598.13 and are kept for 5 years. The bond coupon rate is 7% per year, payable semiannually. Immediately following the owner's receipt of the last coupon payment, the owner sells each bond for $50 less than its par value (price discount). The owner will invest in the bonds if the effective annual yield is at least 9%.What is the face value of each bond?______
Ten bonds are purchased for $9,083.25 and are kept for 5 years. The bond coupon rate is 5% per year, payable annually. Immediately following the owner's receipt of the last coupon payment, the owner sells each bond for $50 less than its par value (price discount). The owner will invest in the bonds if the effective annual yield is at least 7%. What is the face value of the the ten bonds?
A borrower and lender negotiate a $38,000,000 interest-only loan at a 6.0 percent interest rate for a term of 15 years. There is a lockout period of 10 years. Should the borrower choose to prepay this loan at any time after the end of the 10th year, a yield maintenance fee (YMF) will be charged. The YMF will be calculated as follows: A treasury security with a maturity equal to the number of months remaining on the loan will be selected, to which a spread of 150 basis points (1.50%) will be added to determine the lender's reinvestment rate. The penalty will be determined as the present value of the difference between the original loan rate and the lender's reinvestment rate. Required: a. How much will the YMF be if the loan is repaid at the end of year 13 if two year treasury rates are 3 percent? If two-year treasury rates are 5.0 percent, what will be the lender's reinvestment rate? Note: Do not round intermediate calculations, Round "YMF" to the nearest dollar amount. Enter…
7
Suppose you have a 2.5-year remaining on an interest rate swap with a notionalprincipal of $10, 000, 000 between Company A and Company B. Company A pays fixed rateand Company B pays the float rate. Fixed and float payments are exchanged every year andthe last payment was exchanged 6 months ago. The fixed rate is 3.5% per annum, and thefloating rate is tied to the annual LIBOR. The previous 1-year LIBOR rate, set 6 months ago,is 2.75%, 6 month LIBOR is 3.25%. the 1.5-year LIBOR is 3.25%, and the 2.5-year LIBOR is3.50%.Calculate the present value of the fixed and floating legs of the swap, and determine the swap’snet present value from Company A’s perspective. Assume annual compounding for discounting.

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