Assignment $2-30$ points

Bond $P$ is a premium bond with a $10\%$ coupon. Bond $D$ is a $4\%$ coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of $7\%,$ and have eight years to maturity. If interest rates remain unchanged,

a$)$ what are the expected capital gains yield over the next year for Bond $P$ and Bond D$?4$ points

b$)$ explain $($in a couple paragraphs$)$ your answers and the interrelationships among the YTM$,$ coupon rate, and capital gain yield. $2$ points

You bought one of BB Co$.\text{'}$s $10\%$ coupon bonds one year ago for $$1100.$ These bonds make annual payments, have a face value of $$1000$ each, and mature seven years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is $8\%.$ If the inflation rate was $3\%$ over the past year, what would be your total real return on investment according to the Fisher equation? $4$ points

You purchase a bond with an invoice price of $$960.$ The bond has a coupon rate of $5\mathrm{.}5\%,5$ years to maturity, and there are three months to the next semiannual coupon date. What is the flat price of the bond? $3$ points

The yield to maturity on one$-$year zero$-$coupon bonds is currently $7$ percent; the YTM on twoyear zeroes is $8$ percent. The federal government plans to issue a two$-$year$-$maturity coupon bond, paying coupons once per year with a coupon rate of $9$ percent. The face value of the bond is $$100.$ At what price will the bond sell? $4$ points

An analyst uses the constant growth model to evaluate a company with the following data:

Leverage ratio $($asset$/$equity$)$: $1\mathrm{.}5$

Total asset turnover: $1\mathrm{.}6$

Current ratio: $1\mathrm{.}8$

Net profit margin: $6\%$

Dividend payout ratio: $35\%$

Earnings per share in the past year: $$0\mathrm{.}9$

The required rate on equity: $14\%$

Based on an analysis, the growth rate of the company will drop by $25$ percent per year in the next two years and then remain unchanged afterward. Assume that the company will keep its dividend policy unchanged.

a$)$ Use the multi$-$period DDM to estimate the intrinsic value of the company's stock. $5$ points

b$)$ Suppose after one year, everything else will be unchanged but the required rate on equity will decrease to $13\%.$ What would be your holding period return for the year? $3$ points

$6.$ West Fraser Timber Company $($WFT$)$ is expected to have free cash flow in the coming year of $$2$ million and its free cash flow is expected maintain at a sustainable growth rate of $4\%$ per year. It has a debt worth $$10$ million. It's equity cost of capital is $12\%,$ cost of debt before tax is $6\%,$ and it pays a corporate tax rate of $30\%.$ If WFT Company maintains a debt$-$equity ratio of $0\mathrm{.}5$ and the company has $3$ million common shares outstanding, what is the fair value of WFT stock? $5$ points

Problem$1$

Options can be used in combination with stocks to reduce risk or to produce income. Buying protective puts guards against downside risk while allowing for upside potential. Writing covered calls allow investors to earn premium income on a stock they expect to remain stable in price.

WFX Ltd$.$ has a current stock price of $$80$ and does not pay dividends. European call option on the stock is priced $$17\mathrm{.}29$ and European put option is priced $$2\mathrm{.}23,$ for $100-$share contracts expiring in $9$ months, at a strike price of $$70.$

What is the total cost of buying a protective put? $2$ point

What is the total cost of writing a covered call? $2$ point

What will be the payoff and profit of the protective put if the stock price on maturity is $$60,$$$70,$$$80,$ $$86?4$ points

What will be the payoff and profit of the covered call if the stock price on maturity is $$60,$$$70,$$$80,$ $$86?4$ points

Problem$2$

Consider the following funds and the market portfolio:

$\backslash$table$[[,$MBO Fund,$\backslash$table$[[$Clearsky$],[$Fund$]],$Titan Fund,Market Portfolio$],[$Average return,$18\%,12\%,30\%,15\%$