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Today is 01/01/02. On 06/30/03 we will have to make a payment of $100. We can only invest in a risk-free pure discount bond (nominal $100) that matures on 12/31/02 and in a risk-free coupon bond, nominal $100, that pays an annual coupon (on 12/31) of 8% on the nominal value, and matures on 12/31/04. Assume a flat term structure of 7%.
a) How many units of each of the bonds should we buy in order to be immunized with respect to the duration?
b) In the context of the previous problem, suppose that right after the portfolio of bonds is formed, the interest rate goes up from 7% to 10%. Compute the new durations.
Explain what an MNE needs to consider when borrowing funds in a foreign currency. As part of your answer, explain what happens if the foreign currency of the borrowed funds appreciates or depreciates, how you calculate the effective cost of borrowing..
Investors who wish to avoid paying taxes in the present are typically ________. Which of the following is generally NOT TRUE of stock repurchase plans?
A stock has had returns of 11 percent, 29 percent, 16 percent, −17 percent, 29 percent, and −7 percent over the last six years. What are the arithmetic and geometric returns for the stock?
If Campbell were to purchase a nw warehouse for $1.2 million and finance it entirely with long-term debt, what would be the firm's new debt ratio?
A house had a sale price of $240000. The buyer obtained a loan for $220,000. If the lender charges:
YIELD CURVES Suppose the inflation rate is expected to be 7% next year, 5% the following year, and 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very..
If the Austin Company had interest after tax of $10 million, what is the amount of net borrowing for the Austin Company for this period?
Calculate the price of a 9-month American call option on corn futures when the current futures price is 198 cents, the strike price is 200 cents, the risk-free interest rate is 8% per annum, and the volatility is 30% per annum.
Big brothers, inc. borrows $116,647 from the bank at 19.39 percent per year, compounded annually, to purchase new machinery. This loan is to be repaid in equal annual installments at the end of ech year over the next 9 years. How much will each annua..
The Bull bank has a $100,000 30 year loan that was made 6 months ago to a homeowner who is making monthly payments to yield an interest rate of 7% compounded monthly. It would like to sell the loan to increase its overall liquidity. What is the curre..
Given the following, compute the cost of internally generated equity (retained earnings) using the DCF approach: The par value of the firms outstanding 20 year 8% annual coupon debt is 1,000 and the debt currently has a market value of 800.
Johnson & Johnson indicates that it expects that substantially all of the balance of deferred net gains on derivatives will be reclassified into earnings over the next 12 months as a result of transactions that are expected to occur over that period...
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