Reference no: EM132746831
1. How credit default swaps issues have contributed to the mortgage crisis? Who were the buyers of CDSs?
2. If we compare the following bonds, what determinants of interest rates are included in the difference in their yields?
• Corporate bond, 20-year, credit rating AA
• Municipal bond, 10-year, credit rating A
3. If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?
a. A 1-year bond with a 9% coupon.
b. A 10-year bond with a 10% coupon.
c. A 10-year bond with a 12% coupon.
d. A 10-year zero coupon bond.
e. A 1-year zero coupon bond.
4. Is it true? Explain. A bond that is callable has a chance of being repurchased earlier than its stated term to maturity. Therefore, if the yield curve is downward sloping, an outstanding callable bond should have a higher yield to maturity than an otherwise identical noncallable bond.
5. A company sold an issue of bonds with a 6-year maturity, a $1000 par value, a 10% coupon rate, and semiannual interest payments. Market interest rate is 12%. Suppose that 3 years after the issue the going market interest rate rose to 13%. At what price should the bonds be sold 3 years from now?
6. Johnson's Co. issues bonds with 8% coupon rate, paid semiannually, $1000 par value. Bonds mature in 30 years and are callable 6 years from now at $1080. Bonds market price today is $1010, and the yield curve is downward-sloping. Assuming that a company is going to call those bonds from the market one year after the end of the restriction period, provide a model for yield to call estimation. Insert numbers (no calculations required).
7. Explain the following: The stock value includes infinite number of dividends, but in reality the value of the stock is based on the finite number of future dividend payments.
8. Explain the following: Shareholders income consists of dividends and retained earnings. At the same time it is considered as dividends plus capital gains. Why the retained earnings is an equivalent of capital gains from investor's perspective?
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Determinants of interest rates
: 1. How credit default swaps issues have contributed to the mortgage crisis? Who were the buyers of CDSs?
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