Let's consider the NKK dual-currency bond. It is a bond quoted in yen. What would happen to the market price if the following scenarios took place? (8 points)

a. The market interest rate on (newly issued) yen bonds drops significantly.Explain.

b. The dollar drops in value relative to the yen.Explain.

c. The market interest rate on (newly issued) dollar bonds drops significantly.Explain.

d. Would you give the same answers if the same bond were quoted in dollars?Explain.

QUESTION 11

1. What are the annual yield-to-maturity and duration for the following bond: A perpetual bond with an annual coupon of $8 and currently selling at $110? (Hint: Duration of perpetuity = (1+r)/r).Show your work. (5 points)

Q 15

An investor estimates that investing 4.5 million in a venture capital project canreturn 35 million at the end of six years if it succeeds; however, she realizes that the project may fail at any time between now and the end of the sixth year. The investor is considering an equity investment in the project and his cost of equity for a project with this level of risk is 11%. In the table below are the investor's estimates of certain probabilities of failure for the project. First, 0.35 is the probability of failure in year 1. The probability that project fails in the second year, given that it has survived through year 1, is 0.30; and so forth:

Year 1 2 3 4 5 6

Probability 0.35 0.30 0.25 0.25 0.15 0.20

Determine the expected net present value of the project and recommend whether the project should be undertaken.Show your work. (9 points)

QUESTION 20

1. You are British and hold a U.S. Treasury bond with a full price of 100 and a duration of 13. Its yield is 5 percent. The next day, U.S. yields move up by 5 basis points and the dollar depreciates by 1 percent relative to the British pound. Give a rough estimate of your loss in British pounds. If the pound cash rate is 3 percent, what is risk premium?Show your work. (6 points)

Q21

You are British and hold a U.S. Treasury bond with a full price of 100 and duration of 15. Its yield is 6 percent. The dollar cash rate is 2 percent, and the pound cash rate is 3 percent. You expect U.S. yields to move up by 10 basis points over the year. Give a rough estimate of your expected return if you decide to hedge the currency risk. Show that your risk premium is equal to the risk premium of a U.S. investor.Show your work.(8 points)

Q 25

An FRN (floating-rate note) is a bond that pays a quarterly or semiannual coupon indexed on a short-term interest rate such as the LIBOR. (6 points)

a. Why does it make sense to use a short-term interest rate as the index?

b. Why are banks heavy issuers of FRNs?

QUESTION 26

1. A company is deciding whether to issue a one-year dual-currency bond or a one-year currency option bond.

The dual-currency bond would be issued in CHF (Swiss francs) with a principal of 100 CHF per bond, with interest payable in CHF and principal repaid in U.S. dollars ($50). Denote x the interest at which this bond is issued.

The currency option bond is issued in CHF (100 CHF), and the interest and principal are repaid in CHF or $ at the option of the bondholder. The principal repaid is either 100 CHF or $50 and the interest rate is either y CHF or 12 y dollars.

As you guessed, the current spot exchange rate is 2 CHF/$. The current one-year market interest rates are 6% in CHF and 10% in $. One-year currency options are quoted in Chicago. A put CHF is quoted at 1.2 U.S. cents per CHF; this option premium is for one CHF, with a strike price of 50 US cents. (8 points)

a. What is the fair interest rate x on the dual-currency bond?Show you work.

b. Whatis the fair interest rate y on the currency option bond?Show your work.