1. A Walmart bond you purchased two years ago for $890 is now selling for $925. The bond paid $100 per year in coupon interest on the last day of each year (the last payment made today). You intend to hold the bond for four more years and project that you will be able to sell it at the end of year 4 for $960. You also project that the bond will continue paying $100 in interest per year. Given the risk associated with the bond, its required rate of return (r) over the next four years is 11.25 percent. Accordingly, calculate the bond's fair present value and explains that bond if undervalued or not?

 

2.You are considering the purchase of a $1,000 face value bond issued by ExxonMobil. The bond pays 10 percent coupon interest per year, with the coupon paid semiannually (i.e., $50 [=1,000(0.10)/2] over the first half of the year and $50 over the second half of the year). The bond matures in 12 years (i.e., the bond pays interest (122=)24 times before it matures). If the required rate of return (rb) on this bond is 8 percent (i.e., the periodic discount rate is (8%/2=4 percent), calculate the market value of the bond by using the Fair Value of a Coupon Bond, if the required rate of return on this bond is 10 percent. 

 

Part B: Analyze and Evaluate Key Risks in Financial Contracts to Manage Associated Risks with The Financial Instruments

1. Suppose you purchase a 10-year AAA-rated Swiss bond for par that is paying an annual coupon of 8 percent and has a face value of 1,000 Swiss francs (SF). The spot rate is US$0.66667 for SF1. At the end of the year, the bond is downgraded to AA and the yield increases to 10 percent. In addition, the SF depreciates to US$0.74074 for SF1.

(a) What is the loss or gain to a Swiss investor who holds this bond for a year?

(b) What is the loss or gain to a U.S. investor who holds this bond for a year?

2. Calculation of the Liquidity Index

a. Suppose that a bank has two assets: 50 percent in one-month Treasury bills and 50 percent in real estate loans. If the bank must liquidate its T-bills today (P1), it receives $99 per $100 of face value. If it can wait to liquidate them on maturity (in one month's time), it will receive the fair market price of $100 per $100 of face value (P *1). If the bank must liquidate its real estate loans today, it receives $85 per $100 of face value (P2). Liquidation at the end of one month (closer to maturity) will result in a fair market price of $92 per $100 of face value (P 2*). Thus, the one-month liquidity index value for this bank's asset portfolio is.

 

b) Suppose alternatively that a slow or thin real estate market causes the bank to be able to liquidate the real estate loans at only $65 per $100 of face value on an immediate sale. The one-month liquidity index for the bank's asset portfolio is?