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1. A pension fund has an average duration of its liabilities equal to 13 years. The fund is looking at 5-year maturity zero-coupon bonds and 5% yield perpetuities to immunize its interest rate risk. How much of its portfolio should it allocate to the zero-coupon bonds to immunize if there are no other assets funding the plan?
a) 21.00%
b) 38.46%
c) 50.00%
d) 32.82%
2. A bond with a 8-year duration is worth $1,087, and its yield to maturity is 8.7%. If the yield to maturity falls to 8.47%, you would predict that the new value of the bond will be approximately _________.
a) $1,089.50
b) $1,105.37
c) $1,084.50
d) $1,087.00
An all equity firm generates cash flows (CFFA) of $100 million every year in perpetuity. Based on the risk of the cash flows, a discount rate of 20% is appropriate for the firm. The firm is considering a project that will require an investment of $75..
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Explain the implications of your answers in part (b) as they relate to interest rate risk, premium bonds, and discount bonds.
A newly issued 10-year maturity, 4% coupon bond making annual coupon payments is sold to the public at a price of $890. The bond will not be sold at the end of the year. The bond is treated as an original-issue discount bond. Calculate the constant y..
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How would you comment on your thoughts and feelings about international financial system and capital markets after you read this book?
Sisters Corp expects to earn $8 per share next year. The firm’s ROE is 15% and its plowback ratio is 60%. If the firm’s market capitalization rate is 10%. Calculate the price with the constant dividend growth model. Calculate the price with no growth..
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