Chapter 16 - Immunization
|
|
- Loraine Glenn
- 5 years ago
- Views:
Transcription
1 Chapter 16 - Immunization ANSWERS TO QUESTIONS & PROBLEMS 16-1: A. The duration of the assets can be set to a minimum of 1 year (100% in 1 year 7% bonds) and to a maximum of 2.78 years (100% in 3 year 8% bonds). There is no way John can set the duration of the assets to an average of 3 years. B. The present value of $1,000,000 in three years at 10% is $751, The $1000 8% bond trades at $ so John needs to buy 791 $1000 bonds. t=1 Interest Rate in Second Year 9% 10% 11% Coupon from the 791 8% bonds $63, $63, $63, % bonds with 2 years left @$ Purchase bonds 64 bonds 65 bonds 66 bonds Expenditure ($62,874.24) ($62,743.85) ($62,608.92) Number of 8% bonds in the portfolio Market Value $839, $826, Cash $ $ $ TOTAL PORTFOLIO VALUE $840, $826, $813, Interest Rate in Third Year 9% 10% 11% t=2 Number of 8% bonds in the portfolio Coupon from the 8% bonds $68, $68, $68, reinvested residual cash $ $ $ TOTAL CASH $68, $69, $69, % bonds with 1 year left to maturity $ $ $ Purchase bonds Expenditure ($68,367.27) ($68,727.40) ($69,080.87) Number of 8% bonds in the portfolio Market Value $915, $909, $902, Cash $ $ $ TOTAL PORTFOLIO VALUE $916, $909, $903,140.19
2 OLTHETEN & WASPI 2012 Interest Rate 9% 10% 11% t=3 Number of 8% bonds in the portfolio Coupon from the 8% bonds $73, $74, $74, % bonds mature $924, $926, $928, Reinvested residual cash $ $ $ TOTAL PORTFOLIO VALUE $998, $1,000, $1,002, In this case the duration of the assets is shorter than the duration of the liability: the re-investment risk is too large. When rates go down the decrease in reinvestment is too large to be offset by the increase in prices. This is the opposite of the example on pages In that example the duration of the assets was longer than the duration of the liability; the price risk was too large. When rates increased the decrease in price wiped out any gains from reinvestment. 16-2: There are only two cash flows scheduled by the Trust: one payment of $1,000,000 in three years - so six semi-annual periods down the time line; and one payment of $2,000,000 in five years - so ten semi-annual periods down the time line. time Cash Flow NPV NPV/P NPV/P * time 6 $1,000,000. $813, $2,000,000. $1,417, ,231, A. The Net Present Value of the liability is $2,231, If we don't have at least that much in the fund now then Investments Unlimited is in trouble. The duration is years B. Since the durations of the assets is too long, years compared to years,- we should buy shorter duration bonds (bonds with a duration less than 4.27 years)
3 ANSWERS TO QUESTIONS & PROBLEMS 16-3: Let x be the weight in IBM. Thus (1 x) is the weight in GE Duration of Assets Duration of Liabilities 7.56 x 4.00 (1 x) 5.00 years x IBM 28.09% 1 x GE 71.91% IBM: $1,000, $ bonds GE: 1) Round both down IBM: 302 * $ = $280, GE: 616 * $1, = $718, This leaves $1, $1,000, $1, bonds We would prefer to buy another GE bond because it is better to round up the of a GE bond than to round up the of the IBM bond, but we cannot afford another GE bond. However we can afford another IBM bond. So we buy 303 IBM bonds and 616 GE bonds. This leaves us with $71.90 left over. A. To calculate a yield we need a price. We are given prices for both the IBM and the GE bonds. Feeding this information into our calculator should generate a yield of 7.000% As a reality check we notice that the 6% coupon bond is trading at a discount (the yield must be greater than 6%) and the 11% coupon bond is trading at a premium (the yield must be less than 11%), so 7% is reasonable. BOND enter calculate BOND enter calculate SDT = SDT = CPN = CPN = RDT = RDT = RV = RV = /Y 2/Y YLD = YLD = PRI = PRI = AI = AI =
4 OLTHETEN & WASPI : time Cash Flow NPV NPV/P Duration = (NPV/P)*t 2 $250,000. $250,000./(1.02) 2 = $240, $250,000. $250,000/(1.02) 4 = $230, $250,000. $250,000/(1.02) 6 = $221, $250,000. $250,000/(1.02) 8 = $213, A. The duration is semi-annual periods or years. B. $906, $906, C. The prevailing yield is 4%. This means that investors demand a fixed income investment of this risk profile to yield 4%. The 6% bond has a coupon that is based on 6% of the face value. Although there are lots of investors who would be willing to buy a 6% bond in a 4% environment, no-one would be willing to sell this bond unless he could sell it for more than the par value; the bond will sell at a premium sufficient to render the return on investment equivalent to a 4% bond. The 3% bond has a coupon that is based on 3% of the face value. No one would be willing to buy this bond unless he could sell it for less than the par value; the bond will sell at a discount sufficient to render the return on investment equivalent to a 4% bond. D % and 101 6% bonds 3% bond: 6% bond: $906, $ $906, $1, % bonds % bonds Number Issue price Market Value 101 6% bonds $1, $113, % bonds $ $793, You will ask the client to start the trust with 906,823.70
5 ANSWERS TO QUESTIONS & PROBLEMS E. Number Issue Coupon Payment Total Payment 101 6% bonds $30.00 $3, % bonds $ , Total Income paid into the trust 15, F. Number Issue Payment Total Payment 101 6% bonds $ , % bonds $ , cash $15, * (1.015) 1 $15, Cash Position 30, G. Asset price Market Value 101 6% bonds $1, , % bonds $ , Cash $30, TOTAL 943, Rate of Return $906, Out of the $943, we must pay out the first $250,000 and we will have $693, left to finance the remaining three $250,000 payments. H. We must pay out the $250,000 in scholarships but we have only $30, in the account. Obviously we must sell some bonds. But which ones? And how many? To figure this out we must re-immunize. Calculate the value and duration of the remaining payments. time Cash Flow NPV NPV/P 1 $0 Duration (NPV/P)*t 2 $250,000 $250,000./(1.02) 2 = $240, $0 4 $250,000 $250,000/(1.02) 4 = $230, $0 6 $250,000 $250,000/(1.02) 6 = $221, $693, We breathe a sigh of relief because we have $693,382.83,- which is slightly more than the $693, we calculate as required to meet the remaining obligations of the trust.
6 OLTHETEN & WASPI 2012 We recalculate the investment weights: % bond: 6% bond: $693, $ $693, $1, % bonds % bonds and sell bonds accordingly. Cash Reconciliation Price Cash Flow Cash in the account at the end of year 1 $ 30, Sell 273 3% bonds (we have 809 and we only need 536) $ $ 270, Buy 46 6% bonds (we have 101 and we need 147) $ 1, $ -50, SubTotal $ 250, Pay out scholarships $ -250, Cash in the account when we begin year 2 $ leaving the portfolio in the following situation: Asset price Market Value 147 6% bonds $1, , % bonds $ , Cash TOTAL 693,382.83
0 1yr 2yrs 3yrs 4 yrs $1,000, $1,030, $1,060, $1,092, $1,125, $1,159, $1,194, $1,229, $1,266,770.
Question and Problem Answers page 1 Chapter 12 - Prices and Yields 12-1: A. The answer to this question depends on how frequently the interest is compounded. If the bank compounds interest semi-annually
More informationMeasuring Price Sensitivity. Bond Analysis: The Concept of Duration
Bond Analysis: The Concept of Duration Bondholders can be hurt by a number of circumstances: the issuer may decide to redeem the bonds before the maturity date, the issuer may default, or interest rates
More informationAll rights reserved. No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher.
Taken from: Foundations of Finance: The Logic and Practice of Financial Management, Fourth Edition by Arthur J. Keown, John D. Martin, J. William Petty, David F. Scott, Jr. Copyright 2003, 2001, 1998,
More informationLecture 20: Bond Portfolio Management. I. Reading. A. BKM, Chapter 16, Sections 16.1 and 16.2.
Lecture 20: Bond Portfolio Management. I. Reading. A. BKM, Chapter 16, Sections 16.1 and 16.2. II. Risks associated with Fixed Income Investments. A. Reinvestment Risk. 1. If an individual has a particular
More information[Image of Investments: Analysis and Behavior textbook]
Finance 527: Lecture 19, Bond Valuation V1 [John Nofsinger]: This is the first video for bond valuation. The previous bond topics were more the characteristics of bonds and different kinds of bonds. And
More informationFUNDAMENTALS OF THE BOND MARKET
FUNDAMENTALS OF THE BOND MARKET Bonds are an important component of any balanced portfolio. To most they represent a conservative investment vehicle. However, investors purchase bonds for a variety of
More informationBonds and Common Stock
Bonds and Common Stock Bonds 2/22 Yield-To-Maturity Yield-To-Maturity (YTM) is the discount rate at which the sum of all future cash flows from the bond (coupons and principal) equal the price of the bond.
More informationCourse FM 4 May 2005
1. Which of the following expressions does NOT represent a definition for a? n (A) (B) (C) (D) (E) v n 1 v i n 1i 1 i n vv v 2 n n 1 v v 1 v s n n 1 i 1 Course FM 4 May 2005 2. Lori borrows 10,000 for
More informationThis Extension explains how to manage the risk of a bond portfolio using the concept of duration.
web extension 5C Bond Risk and Duration This Extension explains how to manage the risk of a bond portfolio using the concept of duration. Bond Risk In our discussion of bond valuation in Chapter 5, we
More informationBonds. 14 t. $40 (9.899) = $ $1,000 (0.505) = $ Value = $ t. $80 (4.868) + $1,000 (0.513) Value = $
Bonds Question 1 If interest rates in all maturities increase by one percent what will happen to the price of these bonds? a. The price of shorter maturity bond and the long maturity bond will fall by
More informationPricing Fixed-Income Securities
Pricing Fixed-Income Securities The Relationship Between Interest Rates and Option- Free Bond Prices Bond Prices A bond s price is the present value of the future coupon payments (CPN) plus the present
More informationChapter. Bond Basics, I. Prices and Yields. Bond Basics, II. Straight Bond Prices and Yield to Maturity. The Bond Pricing Formula
Chapter 10 Bond Prices and Yields Bond Basics, I. A Straight bond is an IOU that obligates the issuer of the bond to pay the holder of the bond: A fixed sum of money (called the principal, par value, or
More informationMore Actuarial tutorial at 1. An insurance company earned a simple rate of interest of 8% over the last calendar year
Exam FM November 2005 1. An insurance company earned a simple rate of interest of 8% over the last calendar year based on the following information: Assets, beginning of year 25,000,000 Sales revenue X
More informationThis appendix provides supplemental information on formulas, error conditions, and accuracy that may be helpful as you use your calculator.
APPENDIX A Reference Information This appendix provides supplemental information on formulas, error conditions, and accuracy that may be helpful as you use your calculator. Formulas Formulas used internally
More informationFinance 300 Spring 1999 Exam 2 Joe Smolira. Multiple Choice - Put all answers on the answer key - 18 questions - 72 total points
Finance 300 Spring 1999 Exam 2 Joe Smolira Multiple Choice - Put all answers on the answer key - 18 questions - 72 total points 1. Protective covenants are offered for the protection of a. common stockholders
More informationChapter 25 - Options Strategies
Chapter 25 - Options Strategies 25-1: ANSWERS TO QUESTIONS & PROBLEMS The value and profit of a $40 March written call option sold at $2.50 goes to $20 the option expires out of the money. The value is
More informationLecture 8 Foundations of Finance
Lecture 8: Bond Portfolio Management. I. Reading. II. Risks associated with Fixed Income Investments. A. Reinvestment Risk. B. Liquidation Risk. III. Duration. A. Definition. B. Duration can be interpreted
More informationChapter 4 Interest Rate Measurement and Behavior Chapter 5 The Risk and Term Structure of Interest Rates
Chapter 4 Interest Rate Measurement and Behavior Chapter 5 The Risk and Term Structure of Interest Rates Fisher Effect (risk-free rate) Interest rate has 2 components: (1) real rate (2) inflation premium
More informationCreating Forward-Starting Swaps with DSFs
INTEREST RATES Creating -Starting Swaps with s JULY 23, 2013 John W. Labuszewski Managing Director Research & Product Development 312-466-7469 jlab@cmegroup.com CME Group introduced its Deliverable Swap
More informationChapter 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
More informationSolutions For all the benchmark Treasury securities shown below, compute the PVBP for $1 million
FIN 684 Professor Robert Hauswald Fixed-Income Analysis Kogod School of Business, AU Solutions 2 1. For all the benchmark Treasury securities shown below, compute the PVBP for $1 million par value. Explain
More informationINVESTMENTS. Instructor: Dr. Kumail Rizvi, PhD, CFA, FRM
INVESTMENTS Instructor: Dr. KEY CONCEPTS & SKILLS Understand bond values and why they fluctuate How Bond Prices Vary With Interest Rates Four measures of bond price sensitivity to interest rate Maturity
More informationCHAPTER 16: MANAGING BOND PORTFOLIOS
CHAPTER 16: MANAGING BOND PORTFOLIOS 1. The percentage change in the bond s price is: Duration 7.194 y = 0.005 = 0.0327 = 3.27% or a 3.27% decline. 1+ y 1.10 2. a. YTM = 6% (1) (2) (3) (4) (5) PV of CF
More informationReview Class Handout Corporate Finance, Sections 001 and 002
. Problem Set, Q 3 Review Class Handout Corporate Finance, Sections 00 and 002 Suppose you are given a choice of the following two securities: (a) an annuity that pays $0,000 at the end of each of the
More informationFINS2624 Summary. 1- Bond Pricing. 2 - The Term Structure of Interest Rates
FINS2624 Summary 1- Bond Pricing Yield to Maturity: The YTM is a hypothetical and constant interest rate which makes the PV of bond payments equal to its price; considered an average rate of return. It
More informationSanlam Cumulus Investments Recurring payments
For intermediaries June 2017 Sanlam Cumulus Investments Recurring payments Effective Annual Cost (EAC) The Effective Annual Cost (EAC) measure is an Association for Savings and Investment South Africa
More informationMBF2253 Modern Security Analysis
MBF2253 Modern Security Analysis Prepared by Dr Khairul Anuar L9: Bonds and Bonds Valuation www.notes638.wordpress.com What is Bond Market? The bond market is a financial market where participants buy
More informationAsset-Liability Management in Banks
Asset-Liability Management (ALM) Asset-Liability Management in Banks Bankers make decisions every day about buying and selling securities, about whether to make particular loans, and about how to fund
More informationBUSI 370 Business Finance
Review Session 2 February 7 th, 2016 Road Map 1. BONDS 2. COMMON SHARES 3. PREFERRED SHARES 4. TREASURY BILLS (T Bills) ANSWER KEY WITH COMMENTS 1. BONDS // Calculate the price of a ten-year annual pay
More informationExam 3 Practice Problems, FINAN303 Principles of Finance, Spring 2018
Exam 3 Practice Problems, FINAN303 Principles of Finance, Spring 2018 ***These problems are representative of the types of problems you will encounter on the final exam. This set, however, is not exhaustive.***
More informationManaging Interest Rate Risk(II): Duration GAP and Economic Value of Equity
Managing Interest Rate Risk(II): Duration GAP and Economic Value of Equity Pricing Fixed-Income Securities and Duration The Relationship Between Interest Rates and Option- Free Bond Prices Bond Prices
More informationAlan Brazil. Goldman, Sachs & Co.
Alan Brazil Goldman, Sachs & Co. Assumptions: Coupon paid every 6 months, $100 of principal paid at maturity, government guaranteed 1 Debt is a claim on a fixed amount of cashflows in the future A mortgage
More information1. (S09T3) John must pay Kristen 10,000 at the end of 1 year. He also must pay Ahmad 30,000 at the end of year 2.
Chapter 9, Section 1 1. (S09T3) John must pay Kristen 10,000 at the end of 1 year. He also must pay Ahmad 30,000 at the end of year 2. John wants to exactly match his liabilities by purchasing the following
More informationSolution to Problem Set 2
M.I.T. Spring 1999 Sloan School of Management 15.15 Solution to Problem Set 1. The correct statements are (c) and (d). We have seen in class how to obtain bond prices and forward rates given the current
More information4. D Spread to treasuries. Spread to treasuries is a measure of a corporate bond s default risk.
www.liontutors.com FIN 301 Final Exam Practice Exam Solutions 1. C Fixed rate par value bond. A bond is sold at par when the coupon rate is equal to the market rate. 2. C As beta decreases, CAPM will decrease
More informationMath 373 Test 3 Fall 2013 November 7, 2013
Math 373 Test 3 Fall 2013 November 7, 2013 1. You are given the following spot interest rate curve: Time t Spot Rate r t 0.5 3.2% 1.0 3.5% 1.5 3.9% 2.0 4.4% 2.5 5.0% 3.0 5.7% 3.5 6.5% 4.0 7.5% Calculate
More informationAdvanced Financial Modeling. Unit 4
Advanced Financial Modeling Unit 4 Financial Modeling for Debt and Bonds Models for Debt Repayment Modeling Amortizing Loans EMIs Financial Modeling for Bonds Bond Pricing Models for Debt Repayment Companies
More informationBond evaluation. Lecture 7 Shahid Iqbal
Bond evaluation Lecture 7 Shahid Iqbal Have you ever borrowed money??? Of course you have! Whether we hit our parents up for a few bucks to buy candy as children or asked the bank for a mortgage, most
More informationRange Notes KAIST/
ange Notes 2002-6-26 KAIST/ What are structural notes? fixed coupon floating coupon. Straight Debt Interest ate Derivatives (Embeddos) ( ) The Federal Home Loan Bank (FHLB) Federal National Mortgage Association
More informationPrincipals of Financial Management Spring 2017 Section 6, 2: 30. EXAM 2 Version A
FIN 301 Prof. Thistle Principals of Financial Management Spring 2017 Section 6, 2: 30 EXAM 2 Version A MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
More informationQUARTERLY REPORT AND CERTIFICATION OF THE COUNTY TREASURER For Quarter Ending June 30, 2013 COMPLIANCE CERTIFICATION
QUARTERLY REPORT AND CERTIFICATION OF THE COUNTY TREASURER For Quarter Ending June 30, 2013 The Government Code requires the County Treasurer to render a Quarterly Report to the County Administrator, the
More informationChapter 11. Portfolios. Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 11 Managing Bond Portfolios McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved. 11.1 Interest Rate Risk 11-2 Interest Rate Sensitivity 1. Inverse relationship
More informationChapter 9 - Level 3 - Course FM
1. (F11HW) Rivera Insurance Company has committed to paying 10,000 at the end of one year and 40,000 at the end of two years. Its Chief Financial Officer, Miguel, wants to exactly match this obligation
More informationQUARTERLY REPORT AND CERTIFICATION OF THE COUNTY TREASURER For Quarter Ending March 31, 2013
QUARTERLY REPORT AND CERTIFICATION OF THE COUNTY TREASURER For Quarter Ending March 31, 2013 The Government Code requires the County Treasurer to render a Quarterly Report to the County Administrator,
More informationFinance 402: Problem Set 1
Finance 402: Problem Set 1 1. A 6% corporate bond is due in 12 years. What is the price of the bond if the annual percentage rate (APR) is 12% per annum compounded semiannually? (note that the bond pays
More informationCapital Decrease -1- Rules Summary
-1- Capital Decrease Rules Summary Capital decrease is an approach to manage the company s fund appropriately. A company with huge accumulated losses may choose to reduce capital as to wipe out or decrease
More informationBBM2153 Financial Markets and Institutions Prepared by Dr Khairul Anuar
BBM2153 Financial Markets and Institutions Prepared by Dr Khairul Anuar L4: What Do Interest Rates Mean and What Is Their Role in Valuation? www. notes638.wordpress.com 4-1 Chapter Preview Interest rates
More informationFixed Income Investment
Fixed Income Investment Session 4 April, 25 th, 2013 (afternoon) Dr. Cesario Mateus www.cesariomateus.com c.mateus@greenwich.ac.uk cesariomateus@gmail.com 1 Lecture 4 Bond Investment Strategies Passive
More informationYIELDS, BONUSES, DISCOUNTS, AND
YIELDS, BONUSES, DISCOUNTS, AND THE SECONDARY MORTGAGE MARKET 7 Introduction: Primary and Secondary Mortgage Markets The market where mortgage loans are initiated and mortgage documents are created is
More informationMATH/STAT 2600, Theory of Interest FALL 2014 Toby Kenney
MATH/STAT 2600, Theory of Interest FALL 2014 Toby Kenney In Class Examples () September 11, 2014 1 / 75 Compound Interest Question 1 (a) Calculate the accumulated value on maturity of $5,000 invested for
More informationMUNI OPINION Fixed Income
STRATEGY INSIGHTS MUNI OPINION Fixed Income OCTOBER 2012 The price of a defensive portfolio Investors are programmed to seek out investments that have low prices. But in the muni world the price of a bond
More informationChapter 2: BASICS OF FIXED INCOME SECURITIES
Chapter 2: BASICS OF FIXED INCOME SECURITIES 2.1 DISCOUNT FACTORS 2.1.1 Discount Factors across Maturities 2.1.2 Discount Factors over Time 2.1 DISCOUNT FACTORS The discount factor between two dates, t
More informationBusiness Assignment 3 Suggested Answers
Business 2019 Assignment 3 Suggested Answers Each problem is worth 5 marks. 1. A firm has just paid the moment before valuation a dividend of 55 cents and is expected to exhibit a growth rate of 10% into
More informationRISKS ASSOCIATED WITH INVESTING IN BONDS
RISKS ASSOCIATED WITH INVESTING IN BONDS 1 Risks Associated with Investing in s Interest Rate Risk Effect of changes in prevailing market interest rate on values. As i B p. Credit Risk Creditworthiness
More informationMS-E2114 Investment Science Lecture 2: Fixed income securities
MS-E2114 Investment Science Lecture 2: Fixed income securities A. Salo, T. Seeve Systems Analysis Laboratory Department of System Analysis and Mathematics Aalto University, School of Science Overview Financial
More informationP R A C T I C E E X A M
MIME 310 ENGINEERING ECONOMY P R A C T I C E E X A M A P R I L 2 0 0 8 If you want to maximize the benefits that you derive from this exercise, here's what you should do: Give yourself a two to three-hour
More informationMS-E2114 Investment Science Lecture 3: Term structure of interest rates
MS-E2114 Investment Science Lecture 3: Term structure of interest rates A. Salo, T. Seeve Systems Analysis Laboratory Department of System Analysis and Mathematics Aalto University, School of Science Overview
More informationExcelBasics.pdf. Here is the URL for a very good website about Excel basics including the material covered in this primer.
Excel Primer for Finance Students John Byrd, November 2015. This primer assumes you can enter data and copy functions and equations between cells in Excel. If you aren t familiar with these basic skills
More informationBOND VALUATION. YTM Of An n-year Zero-Coupon Bond
BOND VALUATION BOND VALUATIONS BOND: A security sold by governments and corporations to raise money from investors today in exchange for promised future payments 1. ZERO COUPON BONDS ZERO COUPON BONDS:
More informationFinancial Market Analysis (FMAx) Module 2
Financial Market Analysis (FMAx) Module 2 Bond Pricing This training material is the property of the International Monetary Fund (IMF) and is intended for use in IMF Institute for Capacity Development
More informationFinance 100 Problem Set Bonds
Finance 100 Problem Set Bonds 1. You have a liability for paying college fees for your children of $20,000 at the end of each of the next 2 years (1998-1999). You can invest your money now (January 1 1998)
More information22. Construct a bond amortization table for a $1000 two-year bond with 7% coupons paid semi-annually bought to yield 8% semi-annually.
Chapter 6 Exercises 22. Construct a bond amortization table for a $1000 two-year bond with 7% coupons paid semi-annually bought to yield 8% semi-annually. 23. Construct a bond amortization table for a
More informationPaper 2.6 Fixed Income Dealing
CHARTERED INSTITUTE OF STOCKBROKERS September 2018 Specialised Certification Examination Paper 2.6 Fixed Income Dealing 2 Question 2 - Fixed Income Valuation and Analysis 2a) i) Why are many bonds callable?
More informationChapter 3: Debt financing. Albert Banal-Estanol
Corporate Finance Chapter 3: Debt financing Albert Banal-Estanol Debt issuing as part of a leverage buyout (LBO) What is an LBO? How to decide among these options? In this chapter we should talk about
More informationF3 Financial Strategy
Strategic Level Paper F3 Financial Strategy Senior Examiner s Answers SECTION A Answer to Question One (a)(i) Valuation of Company NN (excluding potential synergistic benefits and integration costs) NN:
More informationTwelfth Meeting of the IMF Committee on Balance of Payments Statistics Santiago, Chile, October 27-29, 1999
BOPCOM99/37 Twelfth Meeting of the IMF Committee on Balance of Payments Statistics Santiago, Chile, October 27-29, 1999 Accounting for Interest on Debt Securities: Why the Creditor Approach Should be Preferred
More informationI. Interest Rate Sensitivity
University of California, Merced ECO 163-Economics of Investments Chapter 11 Lecture otes I. Interest Rate Sensitivity Professor Jason Lee We saw in the previous chapter that there exists a negative relationship
More informationStat 274 Theory of Interest. Chapters 8 and 9: Term Structure and Interest Rate Sensitivity. Brian Hartman Brigham Young University
Stat 274 Theory of Interest Chapters 8 and 9: Term Structure and Interest Rate Sensitivity Brian Hartman Brigham Young University Yield Curves ν(t) is the current market price for a t-year zero-coupon
More informationBond Prices and Yields
Bond Characteristics 14-2 Bond Prices and Yields Bonds are debt. Issuers are borrowers and holders are creditors. The indenture is the contract between the issuer and the bondholder. The indenture gives
More informationo Securities firms 02 Financial markets facilitating the issuance of new securities are known as
01 Financial markets that facilitate the flow of long-term funds with maturities of more than one year are known as. o money markets o capital markets o primary markets o secondary markets 02 Financial
More informationMATH 373 Test 4 Fall 2017 December 12, 2017
MATH 373 Test 4 Fall 2017 December 12, 2017 1. A three year bond has an annual coupon of 40 and a maturity value of 1100. Calculate the Modified Convexity for this bond at an annual effective interest
More informationLecture on Duration and Interest Rate Risk 1 (Learning objectives at the end)
Bo Sjö 03--07 (updated formulas 0a and 0b) Lecture on Duration and Interest Rate Risk (Learning objectives at the end) Introduction In bond trading, bond portfolio management (debt management) movements
More informationFIN 6160 Investment Theory. Lecture 9-11 Managing Bond Portfolios
FIN 6160 Investment Theory Lecture 9-11 Managing Bond Portfolios Bonds Characteristics Bonds represent long term debt securities that are issued by government agencies or corporations. The issuer of bond
More informationPaper 2.7 Investment Management
CHARTERED INSTITUTE OF STOCKBROKERS September 2018 Specialised Certification Examination Paper 2.7 Investment Management 2 Question 2 - Portfolio Management 2a) An analyst gathered the following information
More informationManual for SOA Exam FM/CAS Exam 2.
Manual for SOA Exam FM/CAS Exam 2. Chapter 6. Variable interest rates and portfolio insurance. c 2009. Miguel A. Arcones. All rights reserved. Extract from: Arcones Manual for the SOA Exam FM/CAS Exam
More informationLoan types and business terms Business customers
Loan types and business terms Business customers Applicable as from 13 November 2018 Page 1 of 43 Welcome to Realkredit Danmark We want to provide you with all the information you need to decide on how
More informationCHAPTER 14. Bond Characteristics. Bonds are debt. Issuers are borrowers and holders are creditors.
Bond Characteristics 14-2 CHAPTER 14 Bond Prices and Yields Bonds are debt. Issuers are borrowers and holders are creditors. The indenture is the contract between the issuer and the bondholder. The indenture
More informationBond Analysis & Valuation Solutions
Bond Analysis & Valuation s Category of Problems 1. Bond Price...2 2. YTM Calculation 14 3. Duration & Convexity of Bond 30 4. Immunization 58 5. Forward Rates & Spot Rates Calculation... 66 6. Clean Price
More informationMBA Corporate Finance CUMULATIVE FINAL EXAM - Summer 2009
MBA 8135 - Corporate Finance CUMULATIVE FINAL EXAM - Summer 2009 Georgia State University Department of Finance August 1, 2009 Name (please print) Instructor: PART I: MULTIPLE CHOICE Choose the letter
More information2) Bonds are financial instruments representing partial ownership of a firm. Answer: FALSE Diff: 1 Question Status: Revised
Personal Finance, 6e (Madura) Chapter 14 Investing Fundamentals 14.1 Types of Investments 1) Before you start an investment program, you should ensure liquidity by having money in financial institutions
More informationIn Search of a Better Estimator of Interest Rate Risk of Bonds: Convexity Adjusted Exponential Duration Method
Reserve Bank of India Occasional Papers Vol. 30, No. 1, Summer 009 In Search of a Better Estimator of Interest Rate Risk of Bonds: Convexity Adjusted Exponential Duration Method A. K. Srimany and Sneharthi
More informationMONASH BUSINESS SCHOOL. Is Financial Reporting Still an Effective Tool for Equity Investors in Australia?
Is Financial Reporting Still an Effective Tool for Equity Investors in Australia? Project Team and Partner Organisation Professor Matthew Pinnuck Nikole Gyles Professor Michael Davern Dr Dean Hanlon Introduction
More informationSOCIETY OF ACTUARIES FINANCIAL MATHEMATICS. EXAM FM SAMPLE QUESTIONS Interest Theory
SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS Interest Theory This page indicates changes made to Study Note FM-09-05. January 14, 2014: Questions and solutions 58 60 were
More informationDuration Gap Analysis
appendix 1 to chapter 9 Duration Gap Analysis An alternative method for measuring interest-rate risk, called duration gap analysis, examines the sensitivity of the market value of the financial institution
More informationINV2601 SELF ASSESSMENT QUESTIONS
INV2601 SELF ASSESSMENT QUESTIONS 1. The annual holding period return of an investment that was held for four years is 5.74%. The ending value of this investment was R1 000. Calculate the beginning value
More informationLoan types and business terms Business customers
Loan types and business terms Business customers Applicable as from 18 October 2017 Page 1 of 43 Welcome to Realkredit Danmark We want to provide you with all the information you need to decide on how
More informationSOCIETY OF ACTUARIES FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS
SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS This set of sample questions includes those published on the interest theory topic for use with previous versions of this examination.
More informationThe Impact of 2017 Tax Reform: Industry Winners and Losers
The Impact of 2017 Tax Reform: Industry Winners and Losers Turnaround Management Association 2018 TMA Southwest Regional Conference Moderator John Baumgartner - Stout Panelist John T. Bradford Liskow &
More informationUNIT 6 1 What is a Mortgage?
UNIT 6 1 What is a Mortgage? A mortgage is a legal document that pledges property to the lender as security for payment of a debt. In the case of a home mortgage, the debt is the money that is borrowed
More informationBLOM Bank QI 2018 Earnings Conference Call Hosted by Exotix. 22 May 2018
BLOM Bank QI 2018 Earnings Conference Call Hosted by Exotix 22 May 2018 Hello and welcome to BLOM Bank Q1 2018 results conference call. My name is Amelia and I'll be your coordinator for today's conference.
More informationINTRODUCTION TO YIELD CURVES. Amanda Goldman
INTRODUCTION TO YIELD CURVES Amanda Goldman Agenda 1. Bond Market and Interest Rate Overview 1. What is the Yield Curve? 1. Shape and Forces that Change the Yield Curve 1. Real-World Examples 1. TIPS Important
More informationLecture 2 Valuation of Fixed Income Securities (a)
Lecture 2 Valuation of Fixed Income Securities (a) Since we all now have a basic idea of how time value of money works, it is time we put the techniques we learned to some use 1 Fixed Income Securities
More informationCourse FM/2 Practice Exam 2 Solutions
Course FM/ Practice Exam Solutions Solution 1 E Nominal discount rate The equation of value is: 410 45 (4) (4) d d 5,000 1 30,000 1 146,84.60 4 4 We let 0 (4) d x 1 4, and we can determine x using the
More informationCHAPTER 16. Managing Bond Portfolios INVESTMENTS BODIE, KANE, MARCUS. Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
CHAPTER 16 Managing Bond Portfolios INVESTMENTS BODIE, KANE, MARCUS McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. INVESTMENTS BODIE, KANE, MARCUS 16-2 Bond Pricing
More informationLesson 9: Breaking Down the Balance Sheet
Lesson 9: Breaking Down the Balance Sheet As we touched upon in previous lessons, a balance sheet is divided into three categories: Assets, Liabilities, and Owner s Equity. This lesson will go over each
More informationInvestment Advisor(s)
Vanguard Funds Supplement to the Prospectus At a special meeting held on November 15, 2017, shareholders of the Vanguard funds voted on several proposed changes to the funds. As a result, the following
More informationFixed income for your portfolio
Fixed income for your portfolio November 2017 2 Fixed income for your portfolio Defence Fixed income investments such as bonds are widely used in portfolios to enhance income and compliment low risk interest
More informationThe Current Environment for Bond Investing
JOEY THOMPSON 2013-06-21 The Current Environment for Bond Investing U. S. Government bonds are often thought of as safe investments, but like all investments, there is risk involved. When yields and inflation
More informationAFM 371 Winter 2008 Chapter 26 - Derivatives and Hedging Risk Part 2 - Interest Rate Risk Management ( )
AFM 371 Winter 2008 Chapter 26 - Derivatives and Hedging Risk Part 2 - Interest Rate Risk Management (26.4-26.7) 1 / 30 Outline Term Structure Forward Contracts on Bonds Interest Rate Futures Contracts
More informationChapter 2. An Introduction to Forwards and Options. Question 2.1
Chapter 2 An Introduction to Forwards and Options Question 2.1 The payoff diagram of the stock is just a graph of the stock price as a function of the stock price: In order to obtain the profit diagram
More information