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1. What is meant by a bonds duration? Why is it important for an investor to understand this concept?
2. Assume a 2-year Euro-note, with a $100,000 face value, a coupon rate of 10% and a convexity of 4.53. If today’s YTM is 11.5% and term structure is flat. Coupon frequency and compounding frequency are assumed to be annual.
a. What is the Macaulay duration of this bond?
b. What does convexity measure? Why does convexity differ among bonds? What happens to convexity when interest rates rise? Why?
If a new company is expected to growth exponentially and pay dividends of $2, $3, and $4.5, for the first 3 years, respectively. After that time the growth is expected to be at 4% thereafter. The required rate of return is 8%. Find the value of the s..
You will be paying $5,000 a year in tuition expenses at the end of the next 3 years. Bonds currently yield 30%. and if you plant to fund your obligation using a one-year zero-coupon bond and a perpetuity, how much of each of these bonds (in market va..
Karen and Mike currently insure their cars with separate companies, paying $900 and $1,100 a year. If they insured both cars with the same company, they would save 15 percent on the annual premiums. What would be the future value of the annual saving..
Consider the following five hypothetical Treasury securities. What is the implied 1.5 spot rate obtained using bootstrapping? Compare your answer is part (a) to the 1.5 year par rate and explain the difference. Why do we use rates on implied zeros ra..
Twice Shy Industries has a debt−equity ratio of 1.3. Its WACC is 7.1 percent, and its cost of debt is 6.6 percent. The corporate tax rate is 35 percent. What would the cost of equity be if the debt−equity ratio were 1.0?
Jolly Investors Inc. has estimated the following for an investment opportunity: The project is expected to yield cash inflows of $15,000 annually for five years with an initial cash outflow of $50,000. Assume a 10% cost of capital. What is the IRR? A..
understanding supply chain and how the consumer can play a critical role in the supply chain is an important part of
Bill signed a $8,000 discount note at the bank which charged him a 6.5% discount rate. The loan is for 300 days. Please show all work. Find the proceeds: Find the effective rate:
There is an expression that it is best to operate a business using “other people’s money.” Given that other people’s money is reflected in accounts payable, explain how accounts payable affects the external funds required (EFR).
Assume that expected rate of return on market portfolio remains constant but that expected inflation premium increases from a current level of 3 percent to 4 percent. Determine required rate of return on WPS common stock.
The volatility of a non-dividend-paying stock whose price is $78, is 30%. The risk-free rate is 3% per annum (continuously compounded) for all maturities. Calculate values for u, d, and p when a 2-month time step is used. What is the value a 4-month ..
The rate of inflation for the next twelve months (Year 1) is expected to be 1.4%; it is expected to be 1.8% the following year (Year Two); and it is expected to be 2.0% every year after Year Two. Assume the real risk-free rate, r*, is 3 percent for a..
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