1. (10 points total) Suppose you are an investment advisor helping a client decide between two bond options. She has told you she wants the best return possible, but she wants to minimize her risk in case she has to sell the bond prior to maturity. Her options are: Bond 1, which matures in exactly 8 years and has an annual coupon rate of 6%, paid semi- annually, and face value of $1,000, or: Bond 2, which matures in exactly 8 years, and has an annual coupon rate of 12%, paid semi- annually, and face value of $1,000. Assume these bonds have identical default risk and liquidity risk, and both are priced in the market according to the current market interest rate of 9%. (1.1) (6 points) Using the following formula: Dmac CFt 1 1/2 (1+12) P (where i = the annual current market interest rate and t corresponds to the total number of periods (every period is 6 months long in this example), and P refers to the market price of the bond. Calculate the Macaulay duration AND modified duration for each bond, and round each answer to 2 decimal places (eg. 1.23). (1.2) (4 points) In the context of your calculation above, explain which bond your group would recommend and justify your answer, including any considerations that you're taking into account (including assumptions about time frame and reinvested coupons). Try to keep your total response to this part at 6 sentences or less. 2. (10 points total) Suppose that the following table provides information on three stocks and two indices. Each index includes all three stocks, and only these three stocks. The value of each index is presented as of December 31, 2022. Price A B C Weighted Value Weighted Index Index # of shares outstanding Closing price Dec 31, 2022 Closing price Dec 31, 2023 2,000 16,000 9,500 $25 $8 $6 $31.25 $7.20 $5.70 110 125 (2.1) (5 points) Carefully calculate the NEW value of both the price-weighted and value- weighted index at the end of 2023. Round your answers to 2 decimal places (eg. 3.45). (2.2) (5 points) Suppose that you created a portfolio by purchasing 500 shares of each company's stock on December 31, 2022. BRIEFLY discuss which index would better represent the performance of your portfolio over the course of the following year, and why. 3. (5 points) Suppose that a company is about to release their quarterly financial statements (for the previous quarter), and the market consensus is that the corporation will report a loss of $5 per share. If the company instead reports that it actually lost $4 per share the largest loss in the history of the company what does the efficient market hypothesis suggest should happen to the price of a share in the company immediately after the loss is announced? BRIEFLY explain your answer, in five sentences or less. -