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FINA 6240 Exam 1 (2)
QUESTION 1 Why is the duration of a floating rate coupon zero at the reset date? 10 points QUESTION 2 When interest rates go up, duration‐based calculation shows that the value of the bond will go down and vice‐versa. Why is the convexity adjustment always a positive amount regardless of the direction of the interest rate change? 15 points QUESTION 3 When a bond goes on special, the repo rate for borrowing against that bond goes below the General Collateral Rate (GCR) which applies to all other Treasury bonds. Why does that not lead to arbitrage opportunities? 15 points QUESTION 4 Why does an inverted yield curve (long rates lower than short rates) not (for example) result in Z(today for 10 year maturity) < Z(today for 1 year maturity), that is Z(0,10) < Z(0,1)? 15 points QUESTION 5 What is factor neutrality? How does it help beyond calculations based on duration and convexity alone? 15 points QUESTION 6 If the yield curve did not change (interest rates in the economy did not change at all) and the supply and demand for your bond in the market did not change, would the price of the bond you own still change from one day to another? Why? 10 points QUESTION 7 Use these discount rates to calculate equivalent: Use these discount rates to calculate equivalent: continuously compounded annual spot interest rates, semiannually compounded annual spot interest rates. Plot the resulting yield curves. t Z 0.25 0.9891 0.5 0.9798 0.75 0.9713 1 0.9633 1.25 0.9553 1.5 0.9473 1.75 0.9392 2 0.931 2.25 0.9227 2.5 0.9143 2.75 0.9059 3 0.8973 3.25 0.8888 3.5 0.8801 3.75 0.8714 4 0.8627 4.25 0.8538 4.5 0.845 4.75 0.8361 5 0.8272 15 points QUESTION 8 Using the following yield curve, calculate the price of: 8.25 year coupon bond paying a semiannual coupon of 4.85% annually 4.5 year floating rate coupon bond paying a semiannual coupon with a spread of 75 basis points 0.75% 7.25 year floating rate coupon bond paying a semiannual coupon with a spread of 75 basis points 0.75%. The coupon determined at the last reset date was 4.50% annually. t Z 0.25 0.9891 0.5 0.9798 0.75 0.9713 1 0.9633 1.25 0.9553 1.5 0.9473 1.75 0.9392 2 0.931 2.25 0.9227 2.5 0.9143 2.75 0.9059 3 0.8973 3.25 0.8888 3.5 0.8801 3.75 0.8714 4 0.8627 4.25 0.8538 4.5 0.845 4.75 0.8361 5 0.8272 5.25 0.8182 5.5 0.8093 5.75 0.8003 6 0.7913 6.25 0.7823 6.5 0.7733 6.75 0.7643 7 0.7554 7.25 0.7465 7.5 0.7376 7.75 0.7287 8 0.7199 8.25 0.7111 8.5 0.7024 8.75 0.6938 9 0.6852 9.25 0.6767 9.5 0.6683 9.75 0.6599 10 0.6516 15 points QUESTION 9 Using the following yield curve, calculate the Duration of: 8.25 year coupon bond paying a semiannual coupon of 4.85% annually 4.5 year floating rate coupon bond paying a semiannual coupon with a spread of 75 basis points 0.75% 7.25 year floating rate coupon bond paying a semiannual coupon with a spread of 75 basis points 0.75%. The coupon determined at the last reset date was 4.50% annually. t Z 0.25 0.9891 0.5 0.9798 0.75 0.9713 1 0.9633 1.25 0.9553 1.5 0.9473 1.75 0.9392 2 0.931 2.25 0.9227 2.5 0.9143 2.75 0.9059 3 0.8973 3.25 0.8888 3.5 0.8801 3.75 0.8714 4 0.8627 4.25 0.8538 4.5 0.845 4.75 0.8361 5 0.8272 5.25 0.8182 5.5 0.8093 5.75 0.8003 6 0.7913 6.25 0.7823 6.5 0.7733 6.75 0.7643 7 0.7554 7.25 0.7465 7.5 0.7376 7.75 0.7287 8 0.7199 8.25 0.7111 8.5 0.7024 8.75 0.6938 9 0.6852 9.25 0.6767 9.5 0.6683 9.75 0.6599 10 0.6516 20 points QUESTION 10 What is the dollar duration of a portfolio composed of: $90 million long position in 3.25 year coupon bond paying a quarterly coupon of 7.30% annually $130 million short position in 9.5 year floating rate coupon bond paying a quarterly coupon. Use the following yield curve: t Z 0.25 0.9891 0.5 0.9798 0.75 0.9713 1 0.9633 1.25 0.9553 1.5 0.9473 1.75 0.9392 2 0.931 2.25 0.9227 2.5 0.9143 2.75 0.9059 3 0.8973 3.25 0.8888 3.5 0.8801 3.75 0.8714 4 0.8627 4.25 0.8538 4.5 0.845 4.75 0.8361 5 0.8272 5.25 0.8182 5.5 0.8093 5.75 0.8003 6 0.7913 6.25 0.7823 6.5 0.7733 6.75 0.7643 7 0.7554 7.25 0.7465 7.5 0.7376 7.75 0.7287 8 0.7199 8.25 0.7111 8.5 0.7024 8.75 0.6938 9 0.6852 9.25 0.6767 9.5 0.6683 9.75 0.6599 10 0.6516 20 points QUESTION 11 What is the price value of one basis point of: 3.25 year coupon bond paying a quarterly coupon of 7.30% annually. Use the following yield curve. t Z 0.25 0.9891 0.5 0.9798 0.75 0.9713 1 0.9633 1.25 0.9553 1.5 0.9473 1.75 0.9392 2 0.931 2.25 0.9227 2.5 0.9143 2.75 0.9059 3 0.8973 3.25 0.8888 3.5 0.8801 3.75 0.8714 4 0.8627 4.25 0.8538 4.5 0.845 4.75 0.8361 5 0.8272 5.25 0.8182 5.5 0.8093 5.75 0.8003 6 0.7913 6.25 0.7823 6.5 0.7733 6.75 0.7643 7 0.7554 7.25 0.7465 7.5 0.7376 7.75 0.7287 8 0.7199 8.25 0.7111 8.5 0.7024 8.75 0.6938 9 0.6852 9.25 0.6767 9.5 0.6683 9.75 0.6599 10 0.6516 20 points QUESTION 12 Calculate the convexity of: 8.25 year coupon bond paying a semiannual coupon of 4.85% annually 4.5 year floating rate coupon bond paying a semiannual coupon with a spread of 75 basis points 7.25 year floating rate coupon bond paying a semiannual coupon determined at the last reset date 4.50% annual with a spread of 75 basis points. Use the following yield curve: t Z 0.25 0.9891 0.5 0.9798 0.75 0.9713 1 0.9633 1.25 0.9553 1.5 0.9473 1.75 0.9392 2 0.931 2.25 0.9227 2.5 0.9143 2.75 0.9059 3 0.8973 3.25 0.8888 3.5 0.8801 3.75 0.8714 4 0.8627
Budget Monitoring And Format
A quaint but well-established coffee shop, the Hot New Cafe, wants to build a new cafe for increased capacity. Expected sales are $800,000 for the first 5 years. Direct costs including labor and materials will be 50% of sales. Indirect costs are estimated at $100,000 a year. The cost of the building for the new cafe will be a total of $750,000, which will be depreciated straight line over the next 5 years. The firm’s marginal tax rate is 37%, and its cost of capital is 12%.
For this assignment, you need to develop a capital budget. It is important to know what the cafe managers should consider within their capital budget. You must also define the key terms necessary to understand capital budgeting. In this assignment, please show all work, including formulae and calculations used to arrive at financial values. You must answer the following:
- Using the information in the assignment description:
- Prepare a capital budget for the Hot New Cafe with the net cash flows for this project over a 5-year period.
- Calculate the payback period (P/B) and the net present value (NPV) for the project.
- Answer the following questions based on your P/B and NPV calculations:
- Do you think the project should be accepted? Why?
- Define and describe Net Present Value (NPV) as it pertains to the new cafe.
- Define payback period. Assume the company has a P/B (payback) policy of not accepting projects with life of over 3 years. Do you think the project should be accepted? Why?
- Your submitted assignment must include the following:
- A double-spaced, two-page Word document that contains answers to the word questions.
- You must include a Microsoft Excel spreadsheet for your calculations.
- Either the Word document or the Excel spreadsheet must have all of your calculation values, your complete calculations, any formulae that you used, the sources you wish to cite, and your answers to the questions listed in the assignment guidelines.
Environmental Science
Write an essay that explains the environmental connections and relationship(s) among the following three topics:
- Human Population Growth
- Affluent Consumption
- Ecological Footprint