Finance Investment Analysis

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FROM BOOK — Reilly, F., & Brown, K. (2012). Investment analysis & portfolio management (10th ed.). Mason, OH: South-Western Cengage Learning.

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Chapter 18 – questions 1,2,4,5 (page 682).

1. Why does the present value equation appear to be more useful for the bond investor than for the common stock investor?

2. What are the important assumptions made when you calculate the promised yield to maturity? What are the assumptions when calculating promised YTC?

4. We discussed three alternative hypotheses to explain the term structure of interest rates. Briefly discuss the three hypotheses, and indicate which one you think best explains the alternative shapes of a yield curve.

5.         a. Explain what is meant by the term structure of interest rates. Explain the theoretical basis of an upward-sloping yield curve.

b. Explain the economic circumstances under which you would expect to see an inverted yield curve.

c. Define “real” rate of interest.

d. Over the past several years, fairly wide yield spreads between AAA corporates and

Treasuries have occasionally prevailed. Discuss the possible reasons for this. 

Problems 1) b and 2) a & b (page 685).

1. Four years ago, your firm issued $1,000 par, 25-year bonds, with a 7 percent coupon rate and a 10 percent call premium.

b. If these bonds are now called, what is the actual yield to call for the investors who originally purchased them at par?

2. Assume that you purchased an 8 percent, 20-year, $1,000 par, semiannual payment bond priced at $1,012.50 when it has 12 years remaining until maturity. Compute:

a. Its promised yield to maturity

b. Its yield to call if the bond is callable in three years with an 8 percent premium

Complete the following questions:

1) When will a bonds coupon rate, current yield and yield to maturity be equal to one another.

 2) When should an issuing firm exercise a call provision on its’ outstanding bonds? Why?

 3) IBM has a bond issue outstanding with 14 years to maturity. When originally issued the bond had a par value of $1,000, a stated coupon rate of 12% and 15 years to maturity. Currently, similar risk bonds in the market place are yielding 8%. What would you expect IBM’s bond to sell for today? Additionally, at such a price is the bond selling at a discount or a premium? Why?

 4) You are looking to purchase a zero coupon bond. The bond has 10 years until maturity and you require an 8% annual rate of return. What should you pay for this bond?

5) You just purchased a bond for $974.42 that matures in 5 Years. The bond was originally issued at par and had an annual coupon rate of 10%. Calculate the current yield and yield to maturity on the bond you just purchased.

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