Please the midterm information as follows:

PPT Presentation:

S1 -- Cover Page (your name, date, course name and number)

S2 Introduction Search a type of your investment(s) and explain briefly for the reasonchoosing it.

S3 Find an Expected Rate of Return with your expected year of return

S4 Find a Realized Rate of Return

S5 Calculate Face Value of Coupon Bond (Valuation Bond) and Yield to Maturity

S6 -- Calculate the duration of a Bond (see page 93, table 3-7 as reference)

S6 Conclusion

S7 Recommendation

Instructions:

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HOMEWORK 2 Question 1: Please determine the expected rate of return by using \"Trial and Error.\" You need two tables, PVIFA and PVIF, to look for the factor. Please provide a clear calculation and brief explanation. Information as follow: Company purchased bond with par value $1,000 that will mature in 10 Year and pay 5% interest annually. If the bond has market price for $1,175, what is the expected rate of return? Par value = $1000 Interest rate = 5% Interest payment = $50 Number of years until bond Matures = T = 10 Market price = $1,175 Calculating expected rate using \"Trial and Error\" The expected rate is 2.954%. HOMEWORK 2 Question 2: Please calculate the semi-annual Yield-to-maturity. Please provide a clear calculation and brief explanation. Information as follows: The bond with par value $1,000, and rate to maturity for 8%. Bond will sell for $890 with 5 years. F (face value of bond) = $1000 P (Market price of the bond) = $890 n (number of semi-annual periods until maturity) = 5*2 = 10 Rate of maturity = 8% C (Coupon payment) = (P*maturity rate)/2 = (1000*8%)/2 = $40 Semi-annual Yield to Maturity = ( ( (F - P)) + C ) / ( (F + P)/2 ) ) = ( ( (1000 - 890)/10) + 40 ) / ( (1000 + 890)/2 ) ) = ( ( 11 + 40 ) / ( 945 ) ) = ( 51/ 945) = 0.05396 Yield to maturity (YTM) = 2 * 0.05396 = 0.1079 or 10.79% Alternate calculation YTM = (1 + 0.05396)2 - 1 = 0.1108 or 11.08% HOMEWORK 2 Question 3: Please calculate the Value of Bonds. Please provide a clear calculation and brief explanation: Bond has par value $1,000, 10% coupon rate, discount rate 8%, and pay semi-annually. Bond matures in 10 years. Period Cash flow PVIF Discount Cash Flow Par value (Par) = $1000 T (number of years until the bond matures) = 10 r (discount rate) = 8% INT (annual interest or coupon payment) = Par value * Coupon rate = $1000 * 10% = $100 INT Vb 2 2T t 1 Par (1 (r / 2)) 2T t 1 (1 ( r / 2)) INT 1 1 (1 (r 2)) 2T Par 2T 2 (r 2) (1 (r/2)) 100 1 1 (1 (0.08 2)) 20 1000 Vb 20 2 (0.08 2) (1 (0.08/2)) 100 1 1 2.1911 1000 2 0.04 (1.04) 20 1 1 2.1911 1000 50 0.04 2.1911 1 0.4564 50 456.4 0.04 1 0.4564 50 456.4 0.04 1135 .9 The Value of Bonds (Vb) is $1135.9 HOMEWORK 2 Question 4: (see page 93, Table 3-7) The duration of a zero-coupon bond has par value $1,000, coupon rate 8%, 5 years, and paid semi-annually and 6% yield. Par value (Par) = $1000 C (coupon rate) = 8% INT (semi-annual interest or coupon payment) = Par value * Coupon rate = $1000 * 8%/2 = $40 The duration is 4.25 years. Alternatively, if the coupon rate is indeed zero, then the duration would be same as maturity, which is 5 years. MID-TERM GSGIX BOND ISSUE FINANCIAL MARKETS & INSTITUTIONS 16SP-MG762-151 PROFESSOR: GRACER YUNG PRUDHIRAJ ALLAM NEW ROCHELLE CAMPUS 1 RATINGS AND YIELDS - INVESTMENT SELECTION Options Evaluation Investment Selection Demand for yields Funding Source Ratings Comparison High interest for $16.5 billion bond sale by Argentina even with a low rating For various entities including companies and countries Anheuser-Busch InBev 2nd Largest Corporate Bond Sale (and highest $110 bn order book) High Quality High Liquidity (due to large deal size) GSGIX Offer to buy- 2 EXPECTED RATE OF RETURN Expected Rate of Return, interest rate that market participants expect besides receiving all projected cash flows from the security, is 2.975% Source: Market price, Coupon rate, Par Value, Number of Years until maturity, Coupon rate, Yield are obtained from http://markets.on.nytimes.com/research/markets/bonds/bonds.asp 3 REALIZED RATE OF RETURN Realized Rate of Return, the actual interest rate earned on an investment in a financial security, is 3.070% Year 1 Coupon Year 2 Coupon Year 3 Coupon Year 4 Coupon Year 5 Coupon Year 6 Coupon Year 7 Coupon Year 8 Coupon Year 9 Coupon Year 10 Coupon + Principal Final Total V(t) $ 37.50 $ 37.50 $ 37.50 $ 37.50 $ 37.50 $ 37.50 $ 37.50 $ 37.50 $ 37.50 $ 1,037.50 MarketPriceV(0) t(YearstoMaturity) V(t)/V(0) RealizedRateof return[ (V(t)/V(0)) topower(1/t)]- 1 RealizedRateof return Reinvested at 3.65% $ 51.78 $ 49.96 $ 48.20 $ 46.50 $ 44.86 $ 43.28 $ 41.76 $ 40.29 $ 38.87 $ 1,037.50 $ 1,442.99 $1,057.69 10 1.36428 0.03070 3.070% 4 FACE VALUE OF COUPON BOND (VALUATION BOND) AND YIELD Fair value of Coupon Bond, the value that investors would not be willing to pay above, is $1049.347 t INT 2T 1 Par Vb 2 t 1 (1 (r / 2)) (1 (r / 2))2T INT 1 1 (1 (r 2))2T 2 (r 2) Par 2T (1 (r/2)) Vb 36.5 1 1 (1 (0.0307 1))10 1000 10 1 (0.0307 1) (1 (0.0307/1)) 36.5 1 1 1.35311 1000 1 0.0307 1.35311 36.5 8.5016 739.038 1049.347 Yield to maturity that return the bond holder will earn if the bond is purchased at its market price, receives all coupon and principle payments holding the bold until maturity, is 2.987% Calculation Par value = $1000 Coupon rate = 3.65% Interest payment = $36.5 Number of years until bond Matures = T = 10 Market Price = $1057.69 YTM = (I + ( (FV - MP) ) ) / ( (FV + MP) / 2 ) = (36.5 + ( (1000 - 1057.69)/10 ) ) / ( (1000 + 1057.69) / 2 ) = (36.5 - 5.769 ) / ( 2057.69/ 2 ) = 2.987% 5 DURATION OF BOND Duration, the weighted average time to maturity of the investment, is 8.39 years 6 CONCLUSION Fair value ($1049.347)