Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

In scenario 1, assuming you have no cash left after period 1, what is the minimum number of bonds must you own to make the

image text in transcribed

In scenario 1, assuming you have no cash left after period 1, what is the minimum number of bonds must you own to make the required payment in period 2?

Scenario 1 (the main one, focus your attention here) This scenario has one asset and cash. The asset is a bond with face value of $10 that pays interest annually of 5% and is due at the end of the end of two years (e.g. at the end of year 1 makes an interest payment and at the end of year 2, makes an interest payment and also returns the principal amount of $10). You run an annuity company that has promised payments to customers of $100 one year from now and $100 two years from now (periods 1 and 2 respectively). You will start the game either cash heavy or bond heavy, and need to figure out how to maximize the value of your portfolio while also making both payments. Important notes: 1) there is only one round of trading in this game (think year 0, or today). 2) The "face value" or "principal of a bond is the amount used to calculate interest. In the trading round, the price can deviate from the face value. 3) Carries over each period, but at a return of 0%. This applies to any cash you have at the end of year 1 as well. The score will be calculated as follows: if you make both payments, you receive the total value of your portfolio (including the payments). If you miss either payment, the company is forced to liquidate its bond holdings, you receive a score equal to your cash, and 12 the face value of your bonds. Hint: Write a timeline! Figure out how much of each cash/bonds you need to have to meet the minimum payment, then trade to maximize. Scenario 1 (the main one, focus your attention here) This scenario has one asset and cash. The asset is a bond with face value of $10 that pays interest annually of 5% and is due at the end of the end of two years (e.g. at the end of year 1 makes an interest payment and at the end of year 2, makes an interest payment and also returns the principal amount of $10). You run an annuity company that has promised payments to customers of $100 one year from now and $100 two years from now (periods 1 and 2 respectively). You will start the game either cash heavy or bond heavy, and need to figure out how to maximize the value of your portfolio while also making both payments. Important notes: 1) there is only one round of trading in this game (think year 0, or today). 2) The "face value" or "principal of a bond is the amount used to calculate interest. In the trading round, the price can deviate from the face value. 3) Carries over each period, but at a return of 0%. This applies to any cash you have at the end of year 1 as well. The score will be calculated as follows: if you make both payments, you receive the total value of your portfolio (including the payments). If you miss either payment, the company is forced to liquidate its bond holdings, you receive a score equal to your cash, and 12 the face value of your bonds. Hint: Write a timeline! Figure out how much of each cash/bonds you need to have to meet the minimum payment, then trade to maximize

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Applied International Finance

Authors: Thomas J O'Brien

1st Edition

1606497340, 9781606497340

More Books

Students also viewed these Finance questions

Question

Jourmalize entries for credit card sales. E 8 . 1 0 ( L 0 2

Answered: 1 week ago

Question

What are the advantages and disadvantages of an MBO program?

Answered: 1 week ago