Reference no: EM131042406
Aspects of Corporate Finance Instructions:
If you use excel spreadsheets, please copy and paste them into MSWord.
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Ethics:
This is not a group assignment; it is an individual assessment. Your solutions will likely be different from other students. If portions of your assignment are copied or very close to copying, all parties will be penalised for copying.
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Q. 1
Consider the following bonds:
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Bond
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Coupon Rate (annual payments)
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Maturity (years)
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A
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0%
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16
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B
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0%
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11
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C
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5%
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16
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D
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9%
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11
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Required:
a) What is the percentage change in the price of each bond if its yield to maturity falls from 7% to 6%?
b) Which of the bonds A-D is most sensitive to 1% drop in interest rates from 7% to 6% and why? Provide an intuitive explanation in your own words for your answer.
Q.2
What is the risk premium of a zero beta stock? Does that mean you can lower the volatility of a portfolio without changing the expected return by substituting out any zero-beta stock in a portfolio & replacing it with the risk free asset?
Please explain in your own words.
Q. 3
When you purchased your house, you took out a 30-year annual payment- mortgage with an interest rate of 5.5%. The annual payment on the mortgage is $12,000. You have just made a payment & have now decided to pay the mortgage off by repaying the outstanding balance.
Required:
a) What is the amount of the loan taken?
What is the payoff amount if:
b) You have lived in the house for 10 years?
c) You have lived in the house for 19 years?
d) You have lived in the house for 10 years and you decide to pay off the mortgage immediately before the 10th payment is due?
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