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Consider the following scenarios, determine how to hedge each scenario using bond futures, and comment on whether it would be appropriate to hedge the exposure.
a. A bond portfolio manager will be paid a large bonus if her $10 million portfolio earns 6 percent in the current fiscal year. She has done very well through the first nine months. However, she is concerned that interest rates might increase over the next few months.
b. The manager of a company is selling one of its warehouses. The deal will close in two months. The manager plans to buy six-month Treasury bills when the company receives payment for the warehouse space, but the manager is worried that interest rates might decline in the next two months.
c. Sam Blackwell plans to retire in a year. Upon retirement, he will be paid a lump sum based on the value of the securities in his defined-contribution retirement plan. Sam's portfolio consists largely of Treasury bonds, and he is worried that interest rates will be increasing in the coming year.
You have placed an order to purchase 260 shares of every IPO that comes to market. The next two IPOs are each priced at $25 a share and will begin trading on the same day. You are allocated 55 shares of IPO A and 260 shares of IPO B. At the end of th..
Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default is 3%. Estimate the credit default swap spread. Assume payments are made annually.
It has been determined that, in aggregate, financial institutions with depository accounts currently hold excess reserves equal to $3 billion—that is, they hold $3 billion more than is necessary to meet the reserve requirements associated with existi..
Company A is growing fast. Dividends are expected to grow at 30% per year during the next 3 years, 18 % over the following year, and then 8% per year indefinitely. The discount rate is 13%, and the stock currently sells for $65 per share. What is the..
With the Canadian dollar quoted as $.9866/ Canadian dollar, how many Canadian dollars does it take to purchase one U.S. dollar? And, with the Euro dollar quoted as $.7688/ EUR , how many Euro dollars does it take to purchase one U.S. dollar?
The Bike Shop, Inc. has 3 million shares of stock outstanding. The stock currently sells for $14.50 per share. The firm’s debt is publicly traded and was recently quoted at 85% of face value. It has a total face value of $12 million, and it is curren..
John sells his house to Mabel by giving a deed to Mabel. In the purchase agreement John was to buy a title insurance policy protecting Mabel's title. What kind of title policy did John buy Mabel? Coral sells her house to Sky using a land sale contrac..
A bond's price moves to par value as it approaches maturity. The shorter a bond has to maturity, the less sensitive the bond's price is to changes in market interest rates. The longer a bond has to maturity, the more sensitive the bond's price is to ..
The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.60 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year indefinitely. Investors require a return of 10 percent on the company's stock. What ..
If an investment in stock has a value of $3,000 at the beginning of the year and $3,500 at the end of the year, and paid a dividend of $250 at the end of the year, what is the return on the stock for the year?
Assume the following investment opportunities (Investments available) $600,000 cost, returns $170,000 per year for 6 years. Graph the WACC schedule and the IOS schedule, and show the capital expenditure budget for the company. Give the dollar amount ..
IMEX Global Solutions issued a bond on December 31, 2015 to the public which pays $80 once per year in interest and a $1,000 principal repayment after year 10, and is priced in the open market to reflect a required return of 11.5% to bondholders, or ..
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