Answer all quickly
4. Bob's, the firm in the question (3), is considering expanding by building a new superstore. The superstore will require an initial investment of $12.3 million and is expected to produce cash inflows of $1.1 million annually over its 10-year life. The risks associated with the superstore are comparable to the risks of the firm's current operations The initial investment will be depreciated on a straight-line basis over the life of the project. At the end of the 10 years, the firm expects to sell the superstore for $6.7 million. Should the firm accept or reject the superstore project and why? Today, a Treasury bond dealer is analyzing a 2n5% annual ypa ng Treasury coupon bond now trading at $1,012.30. He also observes the following treasury security information: 1-yr STRIPS trading at $970.87 (face value $1,000) 5. 2-yr spot rate 4%. Based on these information, is the coupon bond fairly priced, underpriced, overpriced? Can the dealer earn arbitrage profit? What should the dealer buy and sell? 6, Fixed Income Arbitrage is to find mispricing of coupon bonds through the system of linear equations where # of equations > # of unknowns. Suppose there are only three treasury coupon bonds on the market today: Bond A: 2-year 3% treasury coupon bond, trading today at price $1,007.9 Bond B: 2-year 4% treasury coupon bond, trading today at price $1,027.2 Bond C: 2-year 5% treasury coupon bond, trading today at price $1,050.8 Let Po.1 and Poz be the two unknowns, where Po,1 denotes the price today of a 1-year STRIPS, and Po2 the price today of a 2-year STRIPS. Face value of STRIPS is $1 1) Since each coupon bond is essentially a portfolio of STRIPS, write the 3-equation 2-unknown system. 2) Usually how many pairs of solutions to the 2 unknowns can you solve for this 3-equation 2-unknown system? 3) Focusing on ONLY Bond A and Bond B, will this 2-equation 2-unknown system have solutions? Solve them if ye 4) Interpret the values you solve for Po,1 and Po,2.Suppose they are indeed the correct market value today, wha can you say about arbitrage profit in any of three coupon bonds, in which one(s), how much? X007 x 103 0 4. Bob's, the firm in the question (3), is considering expanding by building a new superstore. The superstore will require an initial investment of $12.3 million and is expected to produce cash inflows of $1.1 million annually over its 10-year life. The risks associated with the superstore are comparable to the risks of the firm's current operations The initial investment will be depreciated on a straight-line basis over the life of the project. At the end of the 10 years, the firm expects to sell the superstore for $6.7 million. Should the firm accept or reject the superstore project and why? Today, a Treasury bond dealer is analyzing a 2n5% annual ypa ng Treasury coupon bond now trading at $1,012.30. He also observes the following treasury security information: 1-yr STRIPS trading at $970.87 (face value $1,000) 5. 2-yr spot rate 4%. Based on these information, is the coupon bond fairly priced, underpriced, overpriced? Can the dealer earn arbitrage profit? What should the dealer buy and sell? 6, Fixed Income Arbitrage is to find mispricing of coupon bonds through the system of linear equations where # of equations > # of unknowns. Suppose there are only three treasury coupon bonds on the market today: Bond A: 2-year 3% treasury coupon bond, trading today at price $1,007.9 Bond B: 2-year 4% treasury coupon bond, trading today at price $1,027.2 Bond C: 2-year 5% treasury coupon bond, trading today at price $1,050.8 Let Po.1 and Poz be the two unknowns, where Po,1 denotes the price today of a 1-year STRIPS, and Po2 the price today of a 2-year STRIPS. Face value of STRIPS is $1 1) Since each coupon bond is essentially a portfolio of STRIPS, write the 3-equation 2-unknown system. 2) Usually how many pairs of solutions to the 2 unknowns can you solve for this 3-equation 2-unknown system? 3) Focusing on ONLY Bond A and Bond B, will this 2-equation 2-unknown system have solutions? Solve them if ye 4) Interpret the values you solve for Po,1 and Po,2.Suppose they are indeed the correct market value today, wha can you say about arbitrage profit in any of three coupon bonds, in which one(s), how much? X007 x 103 0
