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Suppose you observe the following forward rate curve:
Term Forward rate
0y1y 2.00%
1y1y 2.50%
2y1y 3.00%
1) What is the implied 2-year spot rate?
2) What is the no-arbitrage value of a fixed-rate bond with a $100 par value, a 4% coupon rate with annual payments, and a term to maturity of 2 years?
A hedge fund manager has $1,000,000 to invest in the foreign currency market. The dollar-euro exchange rate is quoted as $1.60/ € and the dollar-pound exchange rate is quoted at $2.00/£. If a bank quotes a cross rate of €1.20/£, how much money can he..
You are 62 years old, and your house appraises for $450,000. A bank is willing to give you a reverse mortgage at 50% LTV with a 6% fixed contract rate. You choose an option to receive equal monthly payments over a period of 10 years. If the home appr..
Broussard Skateboard's sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $4 million at the end of 2013. Baxter is already at full capacity, so its assets must grow at the same rate as projected ..
What is the Beta for XYZ Company, given the following information: (a) Expected Return on Company XYZ’s Stock: 7.8%, (b) Expected Return on the Risk Free Asset: 1%, and (c) Expected Rate of Return on the Market: 8.9%.
Paul receives a 90-day letter after his meeting with and appeals officer. He is not satisfied with the $101,000 settlement offer. Briefly identify the relevant tax research issues facing Paul. The pertinent facts of both the case and the ruling match..
Calculate the intrinsic value of the stock and explain whether stock XYZ is underpriced or overpriced.
Bond valuation An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 7% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year. What will the value of the Bond L be if the going interest rate is..
The real risk-free rate, r*, is 1.65%. Inflation is expected to average 2.3% a year for the next 4 years, after which time inflation is expected to average 5.4% a year. Assume that there is no maturity risk premium. An 11-year corporate bond has a yi..
Sauer Milk Company is trying to determine its optimal capital structure The following options are under consideration: Which of the plans has the lowest weighted average cost of capital?
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $130,000 if credit is extended to these new customers. Compute the incremental income after taxes. What will Johnson..
E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $14 in perpetuity, beginning 19 years from now. If the market requires a return of 4.4 percent on this investment, how much does a share of preferred stock cost..
Explain liquidity risk and relate it specifically to venture capital. Do you believe that liquidity risk is more important or crucial in venture capital than in other types of investment? Explain.
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