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Assume a two-year Euro-note (pays coupon annually), $100,000 par value, an annual coupon rate of 10 percent and convexity of 2.7. If today’s YTM is 11.6 percent and term structure is flat, a. What does convexity measure? Why does convexity differ among bonds? What happens to convexity of bonds when interest rates rise? Why? b. What is the exact price change in dollars if interest rates increase by 10 basis points (a uniform shift)? c. Assume the Euro-note is the debt issue of the firm. How should the firm invest the proceeds of the debt issue such that its equity value is immunized against interest rate risk? (i.e. achieve equity dollar duration of zero supposing convexity is ignored). d. How long is the hedge in part (g) (i.e. the zero duration position) good for? Why? Explain.
1 the difference between the price and the par value of a zero-coupon bond represents .a taxes payable by the bond
The Saunders Investment Bank has the following financing outstanding. Debt: 60,000 bonds with a coupon rate of 6 percent and a current price quote of 109.5; the bonds have 20 years to maturity. 230,000 zero coupon bonds with a price quote of 17.5 and..
Review the requirements of the Chapter 3 Mini-Case, parts b through h. Then apply those requirements to do an analysis of STARBUCKS CORPORATION (TICKER: SBUX). Don't complete the mini case itself, just STARBUCKS. Do the analysis on the basis of the f..
The management of Jasper Equipment Company is planning to purchase a new milling machine that will cost $160,000 installed. The old milling machine has been fully depreciated but can be sold for $15,000. The new machine will be depreciated on a strai..
Billy D's Basketball Camp is considering a project that will result in initial aftertax cash savings of $3.9 million at the end of the first year, and these savings will grow at a rate of 5 percent per year indefinitely. What is the discount rate tha..
Seattle Health Plans currently use zero debt financing. Its operating profit is $ 1 million, and it pays taxes at a 40% rate. It has $5 million in assets and because it is all equity financed, $ 5 million in equity. What impact would the new capital ..
If the current exchange rate is $1.25/£, the one-year forward exchange rate is $1.40/£, and the interest rate on British government bills is 10.50% per year, what risk-free dollar denominated return can be locked in by investing in the British bills?..
Over the past five years, a stock produced returns of 14%, 22%, -16%, 2%, and 10%. What is the probability that an investor in this stock will NOT lose more than 8% nor earn more than 21% in any one given year?
The risk-free rate is currently 2.8%. In one year the price of a given share of stock that currently trades at $40 per share is expected to either increase by 8% or decrease by 2%. What is the current value of a call on this stock with exercise price..
The cash flows relevant for a foreign investment should, from the parent company's perspective, include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign count..
Suppose in August of 2015 a high school senior is offered on of the following two tuition vouchers: A voucher that pays $2000 for the upcoming academic year (2015) A voucher that pays $3000 2 academic years in the future (2017) Assume that the studen..
Bob and Lisa are both married, working adults. They both plan for retirement and consider the $2,000 annual contribution a must. First, consider Lisa’s savings. She began working at age 20 and began making an annual contribution of $2,000 at the firs..
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