Calculate the default risk premium for your investment

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Reference no: EM131411253

Q1. Sometimes a company will issue a Callable Bond when they need additional cash to expand their business.  Please explain in your own words the meaning of a Callable Bond.  Also in your explanation describe the benefit a company will receive from issuing a callable bond.

2. As discussed in class an interest rate is computed with certain components such as a risk free rate, inflation and default risk of the investment. Assume the following risk: risk free rate is 2.5%, inflation Year 1 is 2.5%, Year 2 is 3.5% and Year 3 is 4.5%.  You have invested in a three-year bond with an annual interest rate of 7.8%

Required: 

A. Calculate the default risk premium for your investment - show your work.

B. In your own words explain the default risk premium

Q3. Assume that you have two bond investments and the information follows:  Bond A - Par value $8,000, interest paid semi annual, maturity 2 years, stated interest rate is 6%.  Bond B Par value $8,000, interest paid semi annual, maturity 10 years, stated interest rate is 6%.

Required:

A. Assume that the market interest rate will be increasing to 7% in a few months; calculate the current (present) value for Bond A and Bond B.

B. Assume that you can only sell one of the bonds, which bond will you sell before the interest rate changes to 5% -- explain.

Q4. Your friend has invested part of their 401K portfolio in bonds.  The bond investment has two major categories --- (A). Bonds that have a 2 year duration (maturity) and (B). Bonds that have a 9-year duration (maturity).

Required: Since you are taking a Finance class and learning a ton of knowledge from the class, friend has contacted you for help.  Friend has heard that interest rates will be increasing in the near future.  The question from friend is should they place all of their money that has been invested in bonds into the 2-year duration (maturity) portfolio or the 9-year duration (maturity).  Friend's goal is to increase the total value of their bond investment.

What is your answer and explain to friend so they understand the concept.

Q5. Calculate the future value for the following investment's

a. Initial investment of $6,000, maturity 5 Years, interest paid annually at 4.5% Show your work

b. Initial investment of $6,000, maturity 5 years, interest paid semi-annually at 4.5% Show your work

c. Prove your answer in the above investments using an Excel worksheet.

Q6. You have opened a financial instrument that requires the following for the next six years:

a. An annual payment of $2,200 to your account at the end of each year, 5% annual interest paid to your at the end of the year

Required

A. Calculate the future value of your investment at the end of the sixth year --- show your work

B. Prove your answer with an Excel worksheet

Q7. Assume that you and your family want to go on vacation in 5 years.  You are planning to save for the trip.  The estimated cost of the trip will be $10,000.  You have found an investment that will pay 6% annual interest for the next 5 years.

Required:

A.  Calculate the dollar amount that will be required to invest today to reach the financial expense for your vacation.  Use Excel --- show your work

B. Prove your answer with an Excel worksheet.

Q8. You are planning to deposit $4,200 into a financial investment that will pay annual interest rate of 5.5%. 

Required

A. How many years will it take to double your investment --- Show your work?

B. Prove your answer with an Excel worksheet.

Attachment:- Assignment Files.rar

Reference no: EM131411253

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Reviews

len1411253

3/2/2017 7:34:46 AM

The homework due is the first file entitled CPST Chap4_5. The other files are study material that we went over showing the calculations for certain chapter questions. If you click on the amount in the excel amounts, you will see the formula used to calculate the problem. I need to show these formulas in my calculations for this homework assignment.

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