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understanding management

Bond Evaluation Selection And Management 2nd Edition R. Stafford Johnson - Solutions

n be able to establish objectives for communication;
n recognise that communication has rational and emotional aspects;
n appreciate the advantages and disadvantages of verbal, written and visual mediums for communication;
n recognise the importance of delivering your findings to the client;
n understand the means by which those findings can be delivered;
n appreciate some rules which will make the communication of findings more effective.
Q1 Given the sensitivities outlined above, if you were the project leader for the consultants how would you prepare for the meeting?
Q2 In the meeting itself, what steps would you take as consulting team leader to ensure that the presentation runs smoothly?
Q3 What would be your definition of a successful outcome for this consulting project?
n learn how to effectively hand over ownership of the project;
n complete a post-project summary and review;
n undertake follow-up projects and key client management;
n use the consulting project as a case study;
n recognise your success in the consulting exercise;
n recognise how these successes provide evidence of transferable learning;
n be able to document these successes on a curriculum vitae and use them to support career development.
1 Critically appraise the leadership style of the European regional director.
2 What is your assessment of the Ganymede programme and the roles played by the various parties involved?
3 If you were one of the change management consultants, required to deliver a review of Ganymede in order to pitch for business from other clients, what points would you make?
4 If you were the CEO of Wessel GmbH, what actions would you take to address the complexity and poor sales performance of the Robinson Mason European business?
n appreciate the structure and dynamics of the global consulting industry today;
n know who are the key players in the consulting world;
n understand the common career structures in consulting companies;
n gain an insight into becoming a consultant;
n recognise the opportunity to develop an internal consultant managerial style;
n understand the value consultancy skills offer for non-consulting jobs.
Q1 If you were the directors of ABC, how would you approach this second interview?
Q2 If you were the interviewees, what would you do to prepare for the second time?
Q3 Given the case question above, what facts do you think are important in determining your answer?
Explain how subdividing the number of periods to expiration makes the binomial interest rate tree more realistic.
Assume a one-period spot rate follows a binomial process, is currently at S0 =5%, u = 1.02, d = 1/1.02, and the probability of the spot rate increasing in one period is q = .5.a. Show with a binomial tree the spot rates, logarithmic returns, and probabilities after one period, two periods, and
Explain the methodology used for deriving the formulas for u and d.
Comment on the arbitrage-free features of valuing a bond using the equilibrium model.
Suppose a spot rate has the following probability distribution of possible rates after four months:a. Calculate the spot rate’s expected logarithmic return and variance. Assume the current rate is 6%.b. Calculate the spot rate’s annualized variance and mean.c. What are the spot rate’s u and d
Suppose a spot rate has the following rates over the past 13 quarters:a. Calculate the spot rate’s average logarithmic return and variance.b. What is the rate’s annualized mean and variance?c. Calculate the spot rate’s up and down parameters for periods with the following lengths:(1) One
Excel Problem: The following problem should be done using the Excel program Binominal Bond Valuation.xls.Suppose the current spot rate in Question 6 is at 5%. Using the estimated spot rate’s mean and variance calculated in Question 6.b determine the value of a five-year, 5% option-free bond (F =
Excel Problem: The following problems should be done using the Excel programs Binomial Bond Valuation.xls.Given the following: Current spot = 0.08 Annualized mean for the spot rate’s logarithmic return of .022 Annualized variance for the spot rate’s logarithmic return of .0054 Binomial
Given a variability of σ =hVAe= .10 and current one- and two-period spot rates of y1 = .07 and y2 = .0804:a. Generate a one-period binomial interest rate tree using the calibration model.(Hint: try Sd = .08148).b. What do the values of the upper and lower spot rates relative to the current spot
Using the calibrated binomial tree from Question 10 (S0 = .07, Sd = 8.148%and Su = 9.9952%), answer the following:a. Show in a binomial tree the following values at each node:i. The values of an option-free, one-period, 10.5% coupon bond (F = 100).ii. The values of an option-free, two-period, 10.5%
Given a variability of σ =hVAe= .10 and current one-, two-, and three-period spot rates of y1 = .07, y2 = .0804, and y3 = .0904952:a. Generate a two-period binomial interest rate tree using the calibration model.(Hint: try Sd = .08148 from Problem 10 and Sdd = .0906).b. Using the calibrated tree,
Explain how a spread is estimated using the option-adjusted spread analysis.
Using the option-adjusted spread analysis, what is the option-adjusted spread for the three-period, 10.5% callable bond in Question 12 if it is priced to equal its equilibrium price of 103.30? What is the spread if the market prices the bond at 102.80?
Explain the methodology used to estimate a bond’s duration and convexity with the calibration model.
Given the following information on a callable bond: Coupon rate = 10% (annual), with payments made annually Face value = F = $1,000 Maturity = 5 years Callable at $1,100 YTM on a similar noncallable bond = 10% Annualized standard deviation of the noncallable bond’s logarithmic return = .15
Given the following information on a putable bond: Coupon rate = 10% (annual), with payments made annually Face value = F = $1,000 Maturity = 5 years Putable at $950 YTM on a similar nonputable bond = 10% Annualized standard deviation of the nonputable bond’s logarithmic return = .15
Explain the differences between forward and futures contracts.
Define price limits and explain why they are used by the exchanges.
Calculate the actual futures prices and implied futures YTM for the following three T-bill futures contracts: T-Bill Futures Contract March June September IMM Index 93.764 93.3092 91.8607
Suppose you took a short position in a June Eurodollar futures at RD = 5.5%.Determine the futures settlement prices and your position’s profits and losses given the following LIBOR at the June futures’ expiration: 4.75%, 5.00%, 5.25%, 5.5%, 5.75%, 6%, and 6.25%. Determine your profits and
Suppose you took a long position in a September T-bill futures priced at IMM index 95.5. What would be your profit or loss on the position if the price of a spot 91-day T-bill were trading at YTM of 5% (actual/365day-count convention) at the September expiration?
Suppose you were long in a June T-bond futures contract at 92-16. What would you have to pay at the futures expiration for a delivered T-bond if the bond’s conversion factor was 1.2 and the accrued interests on the deliverable bond were$1.50 per $100 face value?
Suppose you were short in a September T-bond futures contract at 93-16. What would your profit or loss be at the September expiration if the cheapest deliverable bond you could purchase in the market were a 15-year, 7% T-bond trading at 115 (clean price) that had accrued interest of $2 and a
Given an FRA with the following terms:a. Notional principal = $20 millionb. Reference rate = LIBORc. Contract rate = Rk = .05 (annual)d. Time period = 90 dayse. Day-count convention = Actual/365 Show in a table the payments and receipts for long and short positions on the FRA given possible spot
Explain the similarities and differences between an FRA tied to the LIBOR and a Eurodollar futures contract.
Explain how the clearinghouse would record the futures trades in a–d. Include the clearinghouse’s payments and receipts needed to close each position.a. Mr. A buys a September T-bond futures contract from Ms. B for $95,000 on June 20.b. Mr. D buys a September T-bond futures contract from Mr. E
Suppose on March 1 you take a long position in a June T-bill futures contract at RD = 5%.a. How much cash or risk-free securities would you have to deposit to satisfy an initial margin requirement of 5%?b. Calculate the values of your equity account on the following days, given the following
Ms. Hunter is a money market manager. In July, she anticipates needing cash in September that she plans to obtain by selling 10 $1 million face-value T-bills she currently holds. At the time of the anticipated September sale, the T-bills will have a maturity of 91 days. Suppose there is a September
Suppose Ms. Hunter anticipates a cash inflow of $9.875 million in September that she plans to invest in 10 $1million face-value T-bills with a maturity of 91 days. Suppose there is a September T-bill futures contract trading at a discount yield of RD = 5%.a. If Ms. Hunter is fearful that short-term
Cagle Manufacturing forecasts a cash inflow of $10 million in two months that it is considering investing in a Sun National Bank CD for 90 days. Sun National Bank’s jumbo CD pays a rate equal to the LIBOR. Currently such rates are yielding 5.5% (annual rate with an actual/365 day-count
Suppose there is a Eurodollar futures contract listed on the IMM that expires at the same time as the FRA in Question 18.a. What would Cagle’s FRA equivalent positions be using the Eurodollar futures?What would Cagle’s cash flows be from the equivalent Eurodollar futures if the LIBOR were 5%
Briefly comment on the following:a. The importance of the delivery procedure on futures contracts, even though most futures contracts are closed by offsetting positions.b. The advantages and disadvantages of price limits.c. The benefits of futures funds.d. The role of locals in ensuring a
Short-Answer Questions:a. What was the primary factor that contributed to the dramatic growth in futures trading over the last twenty years?b. What is a hedge called in which the asset underlying the futures contract is not the same as the asset being hedged?c. A bond manager who hedged her
In the table below, the IMM index prices on three T-bill futures contracts with expirations of 91, 182, and 273 days are shown.a. Calculate the actual futures prices and the YTMs (annualized) on the futures.b. Given the spot 182-day T-bill is trading at annualized YTM of 6.25%, what is the implied
Show graphically and in a table the profit and T-bond price relationships at expiration for the following positions on OTC T-bond options. In each case, assume that the T-bond spot call and put options each have exercise prices of $100,000 and premiums of $1,000, and that there is no accrued
Assume that there is an OTC T-bond spot call with an exercise price of $100,000 and premium of $1,000 and an OTC T-bond spot call option with an exercise price of $101,000 and premium of $500. Also assume the options expire at the same time and that there is no accrued interest at expiration. Show
Assume that there is an OTC T-bond spot call with an exercise price of $100,000 and premium of $1,000, an OTC T-bond spot call option with an exercise price of $101,000 and premium of $500, and an OTC T-bond spot call option with an exercise price of $102,000 and premium of $250. Also assume the
Show graphically and in a table the profit and T-bill futures price relationships at expiration for the following positions on T-bill futures options. In each case, assume that the T-bill futures call and put options each have exercise prices of$987,500 (IMM index = 95) and premiums of $1,250.
Show graphically and in a table the profit and LIBOR relationships at expiration for the following positions on interest rate options. In each case, assume that the interest rate call and put options each have exercise rates of 7%, a LIBOR reference rate, notional principals of $20 million, time
Explain what arbitrageurs would do if the price of an American T-bill futures call with an exercise price of $987,500 were priced at $900 when the underlying futures price was trading at $988,500. What impact would their actions have in the option market on the call’s price? Would arbitrageurs
Explain what arbitrageurs would do if the price of an American T-bill futures put with an exercise price of $987,500 were priced at $900 when the underlying futures price was trading at $986,500. What impact would their actions have in the option market on the put’s price?
If the premium on an option increases, does that mean there is a greater demand for the option? Comment.
Suppose in February Ms. X sold a June 95 Eurodollar futures call contract to Mr.Z for 5, then later closed her position by buying a June 95 Eurodollar futures call for 6 from Mr. Y. Explain how the OCC would handle these contracts. Use actual prices and not the index values.
Evaluate a long position in an OTC December 97 T-bond call option purchased at 1.6 (1 6/32). Evaluate in terms of the profit at T-bond index values at expiration of 95, 96, 97, 98, 99, 100, and
Assume no accrued interest. What is the break-even index price?
Evaluate a long position in an OTC December 97 T-bond put option purchased at 0.25 (0 25/32). Evaluate in terms of the profits at T-bond index values at expiration of 94, 95, 96, 97, 98, 99, and
Assume no accrued interest. What is the break-even price?
Show that the December 97 T-bond call and put options in Problems 12 and 13 conform to the put–call parity model. To show this, assume that the T-bond underlying the option currently is priced at 96, the December expiration is exactly .25 years from the present, and the annual risk-free rate on
Prove the following boundary conditions using an arbitrage argument. In your proof, show the initial positive cash flow when the condition is violated and prove there are no liabilities at expiration or when the positions are closed.a. European futures call option: Ct ≥ Max[PV(ft − X), 0]b.
Explain intuitively and with an example why call and put options are more valuable, the greater their underlying security’s variability.
Short-Answer Questions:a. What is the profit-loss characteristic that characterizes a naked call write?b. What term is used to describe the number of outstanding options contracts?c. What exchange listed then later delisted spot T-bill spot options?d. A September 92 Eurodollar futures call option
In June, the Kendall Money Market Fund forecast a September cash inflow of$18 million that it plans to invest for 91 days in T-bills. The fund is uncertain about future short-term interest rates and would like to lock in the rate on the September investment with T-bill futures contracts. Currently,
Suppose the Kendall Money Market Fund in Question 1 expects interest rates to be higher in September when it plans to invest its $18 million cash flow in 91-day T-bills, but is worried that rates could decrease. Suppose there is a September T-bill futures call contract with an exercise price of 93
Bryce National Bank is planning to make a $10 million short-term loan to Midwest Mining Company. In the loan contract, Midwest agrees to pay the principal and an interest of 12% (annual) at the end of 180 days. Since Bryce National sells more 90-day CDs than 180-day CDs, it is planning to finance
Suppose Bryce National Bank in Question 3 makes a $10 million, 180-day loan to Midwest Mining Company with the loan financed by selling a 90-day CD now at the prevailing LIBOR of 8.25% and then 90 days later (mid-September)selling another 90-day CD at the prevailing LIBOR. Suppose, though, the bank
Mr. Devine is a fixed-income portfolio manager for Stacy Investments. He forecasts a cash outflow of $10 million in June and plans to sell his baseline bond portfolio. The fund currently is worth $10 million, has an A quality rating, duration of seven years, weighted average maturity of 15 years,
Determine Mr.Devine’s revenue from selling his baseline bond portfolio, his profit on the futures contracts, and his total revenue.
As an alternative to a nine-month, 10% fixed-rate loan for $10 million, the Zuber Beverage Company is considering a synthetic fixed-rate loan formed with a$10 million floating-rate loan from First National Bank and a Eurodollar strip.The floating-rate loan has a maturity of 270 days (.75 of a
Given the following CME Eurodollar futures put options: March Eurodollar futures put with exercise price of 91 (IMM index) selling at 2. June Eurodollar futures put with exercise price of 91 (IMM index) selling at 2.1.a. Explain how the Zuber Beverage Company in Question 6 could attain a cap on its
XSIF Trust is planning to invest $10 million for one year. As an alternative to a one-year fixed-rate note paying 8.5%, XSIF is considering a synthetic investment formed by investing in a Second National Bank one-year floating-rate note (FRN)paying LIBOR plus 100 basis points and taking a position
Given the following CME Eurodollar futures call options: June Eurodollar futures call with exercise price of 93 (IMM index) selling at 2. September Eurodollar futures call with exercise price of 93 (IMM index)selling at 2.1. December Eurodollar futures call with exercise price of 93 (IMM
Explain the types of spreads bond speculators could use given the following cases:a. The yield curve is expected to shift down with rates for bonds with differing maturities decreasing by roughly the same percentage.b. Even though the economy is growing, leading economic indicators augur for an
Given a forward rate agreement (FRA) with the following terms: Notional principal = $20 million Reference rate = LIBOR Contract rate = Rk = .05 (annual) Time period = 90 days Day-count convention = Actual/365 Show in a table the payments and receipts for long and short positions on the FRA
Explain the similarities and differences between an FRA tied to the LIBOR and a Eurodollar futures contract.
The Glasgo Manufacturing Company forecasts a cash inflow of $20 million in two months from the sale of one of its assets. It is considering investing the cash in a First National Bank CD for 90 days. First National Bank’s jumbo CD pays a rate equal to the LIBOR. Currently such rates are yielding
The Fort Washington Money Market Fund expects interest rates to be higher in September when it plans to invest its $18 million cash flow in a 90-day CD offered by Sun Bank paying the LIBOR. Suppose the fund decides to hedge the September investment by buying an interest rate put from Provident
In January, the O’Brien Development Company closed a deal with local officials to develop a new office building. The project is expected to begin in June and take 270 days to complete. The cost of the development is expected to be $32 million, with the Western Southern Insurance Company providing
Suppose Eastern Bank offers Gulf Refinery a $150 million floating-rate loan to finance the purchase of its crude oil imports along with a cap. The floating-rate loan has a maturity of one year, starts on December 20, and is reset the next three quarters. The initial quarterly rate is equal to
XU Trust is planning to invest $15 million in a Commerce Bank one-year floating-rate note paying LIBOR plus 150 basis points. The investment starts on 3/20 at 9% (when the LIBOR = 7.5%) and is then reset the next three quarters on 6/20, 9/20, and 12/20. XU Trust would like to establish a floor on
Suppose Commerce Bank sells XU Trust a two-year, $15 million FRN paying the LIBOR plus 150 basis points. The note starts on 3/20 at 9% and is then reset the next seven quarters on dates 6/20, 9/20, and 12/20. Suppose a money center bank offers Commerce Bank a cap for $200,000 with the following
Suppose Commerce Bank in Question 8 decides to hedge its two-year $15 million FRN it sold to XU Trust (FRN terms: Pays the LIBOR plus 150 basis points; starts on 3/20/Y1 at 9%; reset the next seven quarters on dates 6/20, 9/20, and 12/20) by buying a Q-cap (or cumulative cap) from a money center

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