2. The present value (PV) of a certain monetary investment asset Mo, with yield Mt over a time period t, is given by the relationship: PV = Mt/(1+n)'. Explain the role that the parameter n plays in determining the eventual terminal value of this monetary investment.
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- The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, andtwo years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of£) as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantitydemanded/supplied at this interest rate? What happens to the demand/supply of the bond asthe interest rate increases? Explain why. c) What is the equilibrium interest rate? d) Suppose that the bond trades at premium. Is there excess demand or supply? Explain.e) There is a business cycle expansion, so both supply and demand shifts. After the shift, thenew demand curve is given by: D = 4000 + X − 2P, whereas the new supply curve is S =2P + 200. For which values of X will the interest increase/decrease? Which values of X arein line with empirical data?Modified duration.. represents the 9% impact - expressed as a number, not as a decimal – on price given a 196 change in yield. represents the weighted average term to maturity – expressed in years - of a bond's cash flows. represents the $ impact on a bond's price of a 100-basis point change in interest rates. is useful for quantifying a bond's credit riskModified duration . represents the 9% impact – expressed as a number, not as a decimal – on price given a 19% change in yield. · represents the weighted average term to maturity – expressed in years - of a bond's cash fiows. represents the S impact on a bond's price of a 100-basis point change in interest rates. is useful for quantifying a bond's credit risk.
- A business intends to use 90-day bank- accepted bill futures to hedge the interest rate risk resulting from its plans to borrow approximately $40 million using the issue of commercial paper in three months. The yield on commercial paper is currently 6.68% p.a. and the 90-day bank-accepted bill futures are currently priced at 95.35. The effective cost of funds if, in three months time the yield on commercial paper is 7.1% p.a. and the 90-day bank-accepted bill futures contract is priced at 94.10, is % p.a. (rounded to two decimal places)You have been promoted to head of Treasury and Investment Management at Ecobank andhave been handed information on a number of issues for which immediate answers arerequired. For each excerpt from the issues presented below answer the associatedquestion(s):(i) Ecobank holds ¢500 million T-Bill but is in short of cash. It needs cash to meetthe requirement of a customer who has come to withdraw ¢400million.Youhave been asked to approach Barclays Bank to sell the T-Bill for ¢495 millionwith agreement to repurchase within 4 working days.(a) How much in cedis does Ecobank lose in this transaction(b) What is the Repo Rate on this transaction (ii) You have just been offered a commercial paper with a face value of ¢45,000,000which bears a discount of 36% and has 182 days to mature.(a) How much will you be prepared to pay for this paper? (b) What is the cedi discount on the paper? (iii) Ecobank plans to issue a 2-year bond with a face value of ¢500,000,000 bearing20% coupon rate. The market…Task 2 a) Calculate the market price in equilibrium for an investment that in the period before had a dividend of SEK 10 with an expected growth rate of 3% per period indefinitely. The share has a risk-adjusted discount rate of 7%.
- a. compute the IRR of the Haven project. Use the intelligent "guess and check" method to identify an appropriate interpolation range (hish interest - low interest «= 3%). Be sure to document your choice of interest rates to try (like, why did you choose 5% next instead of 20%). Then use linear interpolation to approximate the IRR to one decimal place (XXX%). b. These projects are mutually exclusive (only one can be chosen). Which one do you recommend and why? Perform any additional calculations necessary.Recently, the European Central Bank (ECU) has been worried about inflation and thus needs to make a decision about interest rates, and thus the resulting bond prices. Assume we are talking about Euron an Savings Bonds (ESB) and you are given the following information: The European Savings Bond (ESB) has no expiration date: The ESB price =$1,000 the ESB has a fixed annual interest payment =$10, ' e ESB annual interest rate =10 percent. If the price of the ESB increases to $5,000, the interest rate will Multiple Choice ◻ rise to 50 percent. ◻ fall to 4 percent. ◻ fall to 5 percent. ◻ rise to 12 percent. ◻ fall to 2 percent.As Financial Manager what would be your decision on assets and investment matters to meet profit maximization? Choose the best answer. 1. A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs P35,000 and is expected to provide earnings over three years as described below. Based on the profit- maximization goal, the financial manager would choose ASSET YEAR YEAR 1 2 1 21,000 15,000 6,000 2 9,000 15,000 21,000 3 3,000 20,000 19,000 4 6,000 12,000 12,000 А. Asset 1 В. Asset 2 C. Asset 3 D. Asset 4 Why the financial manager should maximize their wealth? How would they prove that there was a transaction so that the demander will be able to repay the supplier on time and at the right amount? Do you think using those financial institutions would help the company to grow
- Mf1. 6) Lindsey Lohan is a foreign exchange trader for a bank in New York. She has $1 million (or its Swiss franc equivalent) for a short-term money market investment and she decides to seek the full 4.800% return available in US dollars by not covering her forward dollar receipts -- an uncovered interest arbitrage (UIA) transaction. Assess this decision. She faces the following quotes: Assumptions Value Arbitrage funds available $1,000,000 Spot exchange rate (SFr./$) 1.2810 3-month forward rate (SFr./$) 1.2740 Expected spot rate in 90 days (SFr./$) 1.2700 U.S. dollar 3-month interest rate 4.800% Swiss franc3-month interest rate 3.200%A bank agrees a repurchase agreement (Repo) with its prime broker using £30 million of Mortgage Backed Securities as collateral for a period of 50 days. The prime broker levies a haircut of 10 per cent and charges an annual Repo rate of 4.5 per cent. What is the price at which the bank will repurchase the £30 million MBS at the end of 50 days when the Repo rate interest applies only on the sum of money being lent by the prime broker ? Use a 360 day-count.Your Company, manager of the Gigantic Mutual Fund, knows that her fund currently is well diversified and that it has a CAPM beta of 1.0 The risk-free rate is 8% and the CAPM risk premium of 6.2%. She has been learning about measures of risk and knows that there are (at least) two factors: changes in industrial production index, δ1 and unexpected inflation, δ2 The APT equation is E(Ri) – Rf = [δ1 – Rf]bi1 + [δ2 – Rf]bi2, E(Ri) = 0.08 + [0.05]bi1 + [0.11]bi2. Required If his portfolio currently has a sensitivity to the first factor of bi1= -0.5, what is its sensitivity to unexpected inflation? If she rebalances her portfolio to keep the same expected return but reduce her exposure to inflation to zero (i.e., bi1= 0) what will its sensitivity to the first factor become?