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An investor plans to retire in 10 years. As part of the retirement portfolio, the investor buys a newly issued, 12-year, 8% annual coupon payment bond. The bond is purchased at par value, so its yield-to- maturity is 8.00% stated as an effective annual rate.
-Calculate the approximate Macaulay duration for the bond, using a 1 bp (0.01%) increase and decrease in the yield-to-maturity and calculating the new prices per 100 of par value to six decimal places.
-Calculate the duration gap at the time of purchase.
-Does this bond at purchase entail the risk of higher or lower interest rates?
You are in a situation that you suspect there is an arbitrage opportunity with options you are studying.
Suppose we can create two products: A and B; A and B are mutually exclusive to each other. The price of both products is $4 in real terms. The Sales Volume for product A is 5 million units yearly, and for product B is 10 million yearly. Which product..
If a firm permanently borrows $100 million at an interest rate of 8%, what is the present value of the interest tax shield? (Assume that the marginal corporate tax rate is 30%.)
Drogo, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 16 years to maturity that is quoted at 105 percent of face value. The issue makes semiannual payments and has an embedded cost of 10 percent annually. Wh..
Suppose Stark Ltd. just issued a dividend of $2.24 per share on its common stock. The company paid dividends of $1.80, $1.98, $2.05, and $2.16 per share in the last four years. If the stock currently sells for $45, what is your best estimate of the c..
Hose plc presently has a capital structure which is 30% debt and 70% equity. The cost of debt before taxes is 8% and for equity 15%. The firm's future cash flows, after tax but before interest, are expected to be perpetuity of €650.000. Calculate the..
Discuss how efficient the U.S. financial markets are in pricing financial securities.
Propose an alternative strategy to cover the risk of loss for the producer and the user of the Copper, but this time using Options.
You own one share of a nondividend-paying stock. how much do you now pay your broker?
The Walgreen Corporation is contemplating a new investment that it plans to finance using one-third debt. The firm can sell new $1000 par value bonds with a 15 year maturity at a price of $946 that carries a coupon interest rate of 12.3 percent that ..
Construct a synthetic long put strategy with strike price $40 and what is the cost of this strategy?
A problem with swaps is the lack of standardized contracts, which limits the development of a secondary market. Paying executives with stock options encourages them to take less risk. Risk management makes sense for firms directly engaged in activiti..
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