Monetary Finance

© All Rights Reserved

12 views

Monetary Finance

© All Rights Reserved

- fin 548 answer scheme
- Nishat Mills (Afm Report)
- Canadian Securities Fast Track Study Guide
- 141-0105
- P........
- Fundamental of Corporate Finance,chpt7
- 108QP_1101
- Construction Economics & Finance
- Chap - 10 Submission (Mudassir Mehdi)
- Case 1. Risk and Return
- Fins2624 Notes
- FISD-03-A
- Rudi M Brewster Financial Disclosure Report for 2010
- Lighthouse Weekly Chart Window - 2013-12-09
- Ic Dictionary Mercer
- Mgt201 Solved Subjective
- FIN 515 Entire Course - Updated Course - Problems Sets, DQs, Quizzes, Midterm and Final Exam
- Stocks and Bonds
- Course 10 ROR ANALYSIS.ppt
- Chapter 7

You are on page 1of 4

EDV M312

Academic year 2013-2014

Macroeconomics stabilization & structural adjustment: monetary &

financial aspects

Prof. Paul Reding

Small Individual Home Assignment 1

Horace Owiti Onyango

1. You have paid 980.30 for an 8% coupon bond with a face value of 1000 that matures in 5

years:

a) Which one of the following values is the correct yield to maturity of the bond? 8.50%; 7.55%;

8.87% (Justify!)

Solution

The correct yield is 8.50% and it is calculated from the relationship below.

P = c(1 + r)-1 + c(1 + r)-2 + . . . + c(1 + r)-Y + B(1 + r)-Y

Where:

c = annual coupon payment (in dollars, not a percent)

Y = number of years to maturity

B = par value

P = purchase price

r = Yield to maturity

Substituting in the equation we get:

980.30 = 80 {[1- (1+r)

-5

] /r} + 1000(1+r)

-5

Solving for r using a financial calculator gives 8.50%

b) You plan on holding the bond for one year. If you plan to earn an expected rate of return of

10% on this investment, what price must you sell the bond in one year? (Justify!)

Solution

To find this, the relationship below is used:

Where: R= Rate of return on the bond

C = Coupon payment

P

t+1

= Price of the Bond one year later

P

t

= Price of the Bond today

Hence solving:

0.1 =

= 998.33

The value of

of the change in value of the bond due to difference in prices and payments to the

owner in terms of coupons.

c) Do you think this expectation is realistic if you consider the implication of the market price of

the bond in one year being at that level?

For this to be realized, the interest rates would have to fall so that the price of the bond in the

same year increases. As such, it is only realizable if the interest rate increase sizably within the

year.

2. Using portfolio_simulation.xls file on the courses web-campus site, consider the following

two assets, whose returns R

A

and R

B

are jointly normally distributed with:

~ N {

}

Indicating the vector of expected returns and the variance-covariance matrix of the joint

distribution. Consider the portfolio composed of 30% of asset A and 70% for asset B and

compare it with the minimum variance portfolio, in terms of expected return and volatility. Is

this portfolio attractive for you! Discuss!

Solution:

Asset A Asset B

Expected R 0.05 0.14

Sigma of R 0.015 0.1

Corr(Ra,Rb) -0.8

Minimum Variance Portfolio is For X* = 0.89

Expected Return on Portfolio Xa+(1-X)B 0.1130

Sigma (Std Dev.) of Portfolio Xa+(1-X)B 0.0665

Expected Return Minimum Variance Portfolio 0.0602

Sigma (Std Dev.) of Minimum Variance Portf. 0.0080

The portfolio has more expected return (0.1130) compared to the minimum variance portfolios

(0.0602). However, it is also more risky (0.0665) than the minimum variance portfolio (0.0080)

by comparison of their standard deviations. Additionally, more returns can be realized by

reducing the proportion of asset A in the portfolio but this also amplifies the risk. On the other

hand reducing the proportion of asset A not only reduces the risk, but also the expected return.

Since I am very risk tolerant, this portfolio is attractive to me due to its high expected returns

relative to the minimum variance portfolio, though it be more risky.

3. How do you interpret the following data: on February 4, 2014, the price of a 5 year Sovereign

credit default swap for Indonesia is 241 basis points?

Solution:

The Sovereign Credit Default Swap for Indonesia being 241 basis points on the given date

implies that the credit insurer (Indonesia) will charge 2.41% each year for covering the risk

against default (1 basis point = 0.01%). As such, it reveals the annual amount the protection

buyer must pay the protection seller over the length of the contract (5yrs) or until default.

4. Consider the stock of Company Z, for which the current price is $55. It is expected to pay out a

dividend of $1.20 in one year. Given all the information you could gather about Company Z and

its prospects for the coming year, you expect to resell the stock, the next day of the dividends

pay-out, at a price of $62.

a) What is the expected holding period return of this stock (over the coming year)?

Solution

Therefore:

55 = 1.20/(1+K

e

) + 62/(1+K

e

) K

e

=0.14909 or 15%

Thus the expected holding period return of this stock is 15%.

b) Would you be willing to buy this stock if the following alternative investment opportunity

were available to you: a one year time deposit at 12% interest rate? Justify your answer,

also explaining which additional factors you would consider before taking your decision!

Solution

Though its expected return is higher (15%) compared to the one year time deposit (12%), I will

have to consider if the difference in return would compensate me enough for the risk, since the

bank has no default hypothesis. Additional factors I would consider include: the volatility of the

stock prices and the aspect of liquidity.

5. Discuss what is meant by the risk premium embodied in an assets expected return. Apply this

discussion to the one year expected return on the stock of a given company (e.g. Coca-Cola):

Suppose, in this context, that currently the beta of such a stock is 1.7, that the market risk

premium is equal to 6.8% and that the risk free rate is 4%. If you feel that the CAPM is a good

reference for assessing the pricing of stocks, would you buy this stock if, based on the expected

future payouts and its current price, the expected return is 12.5%. Explain briefly!

Solution

Risk Premium is the return in excess of the risk-free rate of return that an investment asset is

expected to yield. An asset's risk premium is a form of compensation for investors who tolerate

the extra risk - compared to that of a risk-free asset - in a given investment.

E(r

j

) ( Expected return of stock)= r

f

(Risk free rate) +

j

(beta)*r

m

(market risk

premium)

Therefore:

E(r

j

) =0.04 +1.7(0.068) E(r

j

)=15.56%

No, since I feel that the return is 15.5%, but the CAPM says it is 12.5%, then I will not buy it if I

believe CAPM is a good reference and also if I am not comfortable with an amount less than

15.5%.

- fin 548 answer schemeUploaded byDayah Angelofluv
- Nishat Mills (Afm Report)Uploaded bykk5522
- Canadian Securities Fast Track Study GuideUploaded byKaren Murphy
- 141-0105Uploaded byapi-27548664
- P........Uploaded byleenajaiswal
- 108QP_1101Uploaded byRewa Shankar
- Construction Economics & FinanceUploaded byAnkit Srivastava
- Fins2624 NotesUploaded byKevin Yu
- Fundamental of Corporate Finance,chpt7Uploaded byYIN SOKHENG
- Chap - 10 Submission (Mudassir Mehdi)Uploaded byMudassirMehdi
- Case 1. Risk and ReturnUploaded byLhen Jhoy Zingapan
- FISD-03-AUploaded byKanchan Sharma
- Lighthouse Weekly Chart Window - 2013-12-09Uploaded byAlexander Gloy
- Rudi M Brewster Financial Disclosure Report for 2010Uploaded byJudicial Watch, Inc.
- Ic Dictionary MercerUploaded byGantulga Namdaldagva
- Mgt201 Solved SubjectiveUploaded byzahidwahla1
- FIN 515 Entire Course - Updated Course - Problems Sets, DQs, Quizzes, Midterm and Final ExamUploaded byLeoClifford67
- Stocks and BondsUploaded byGyle Contawe Garcia
- Course 10 ROR ANALYSIS.pptUploaded byMauvil Sulinci
- Chapter 7Uploaded byMorerp
- Tutorial Questions Set 1Uploaded bysafiebutt
- 350fsUploaded bysgbusinesslist
- Reduce Equity Risk With Structured Notes - MarketWatchUploaded byKirankumar Nalli
- fmUploaded byv_viswaprakash3814
- Solutions Chapter 7.docxUploaded byJudy Anne Salucop
- 2014 Q3 Update - Asset AllocationUploaded bydpbasic
- FieUploaded byChandini Alla
- sm04Uploaded byAn Hoài
- tla ch02Uploaded byapi-341661305
- Article 3 Risk Return of Pharmaceutical IndustryUploaded bysoumithrasasi

- DeterminationUploaded byHorace Owiti O.
- Bible StudyUploaded byHorace Owiti O.
- Kenya- South Coast, Mombasa Evangelism opportunity and TrainingUploaded byHorace Owiti O.
- Evangelism1Uploaded byHorace Owiti O.
- Message to the ChurchUploaded byHorace Owiti O.
- Character buildingUploaded byHorace Owiti O.
- ppt_printUploaded byHorace Owiti O.
- Assign Bus EthicsUploaded byHorace Owiti O.
- Determination-Power point HoraceUploaded byHorace Owiti O.
- Dramatized DebateUploaded byHorace Owiti O.
- Final_al Farsy ReportUploaded byHorace Owiti O.
- Testimony in the UniversityUploaded byHorace Owiti O.

- Islamic Capital Market 1Uploaded byLyna
- wallstreetjournal_20171113_TheWallStreetJournalUploaded bysadaq84
- Agreement Between Stanford U.S. Receiver and Antiguan Joint Liquidators of Stanford International BankUploaded byStanford Victims Coalition
- Lecture 9Uploaded byMohammed Raihan
- Financial ServicesUploaded byDinesh Sugumaran
- Nyse Coty 2016Uploaded byOlga Stroganof
- Chap010 quiz.pdfUploaded byLê Chấn Phong
- How to Start a Money Remittance Business in the PhilippinesUploaded byzanee
- BILLS DISCOUNTINGUploaded byDr Sarbesh Mishra
- India Budget 2014-Highlights (1)Uploaded bypraghya30
- 27 Ricardo b. Bangayan vs. Rizal Commercial Banking CorporationUploaded byArthur Archie Tiu
- ECB - Financial Stability Review May 2015Uploaded byYannis Koutsomitis
- Jk Papers Finance ProjectUploaded bydodiyavijay25691
- Visa Requirements and ProceduresUploaded byDannuel Go Uy
- Finman 3 EwanUploaded byNorman Christopher Lopez
- HSBC 161022 - Credit Card Dispute FormUploaded bypercysmith
- Covered Interest ArbitrageUploaded byKamrul Hasan
- Series 7 ExamUploaded byEj_White_7198
- Financial ManagementUploaded byShariff Mohamed
- Chapter 16 - KarenUploaded byMitzhie Samson
- 52977573-Macquarie-technicals.pdfUploaded bycaxap
- NoticeUploaded bycsheenajain
- Contract 2Uploaded bypujasinghsingh
- MKIBN20080317-0014EUploaded byberznik
- pwcUploaded byJohn Lee
- FM11 Ch 13 Instructors ManualUploaded byfalcon724
- Behringer Harvard Opportunity Fund IUploaded bytower8
- COA_C2004 006 ReceiptsUploaded bylou ann
- The Credit Risks and Credit Life CycleUploaded byRayniel Zabala
- Who Uses Fair Value Accounting for Non Financial Assets After Ifrs AdoptionUploaded byVincent S Vincent