1) The modern global economic system
In finance we learn that while the future is always uncertain there are ways we gain insight and make the best possible investment decisions possible. Currently the developed economies are in deep recession while the so-called "BRIC Economies" seem to be doing well.
You will be making a single investment, your life savings, in either the developed economies or the BRIC economies. Pick one and justify your choice.
2) Fixed income instruments
2A)
When a bond is purchased the buyer is acquiring a set of cash flows.
What considerations must be undertaken by the purchaser before undertaking a trade? What are the possible risks the buyer is exposed to? What risks do the sellers incur when offering debt to the public?
2B)
Calculate the price of the following instruments, showing all work:
|
Nominal
|
2500
|
100
|
1000
|
|
Coupon(%)
|
6%
|
6%
|
10%
|
|
Maturity (years)
|
4
|
3
|
2
|
|
Payment frequency
|
ANN
|
SEMI ANN
|
ANN
|
|
Discount rate
|
3%
|
6%
|
11%
|
Which bond trades at par?
Having identified the appropriate bond, use it's parameters to answer the following questions:
What will be the price of this bond if the discount rate increases by 1%?
What will be the price of this bond if the discount rate decreases by 1%?