Introduction...//

A company must raise new capital externally to invest in a new project. The investment cost of the project is 100 and the project generates a certain cash flow of 140. This information is known to the potential new external investors. The company has no internal financial resources to finance the project, and it can only raise new equity externally. However, the potential new investors do not know whether the current asset value of the company (i.e., before investing in the new project) is 100 or 20 and estimate both possible values as equally likely. The manager of the company knows the true current asset value, but cannot make this information public for competitive reasons. All participants are risk-neutral, the manager acts in the interest of the existing shareholders and the risk-free rate is zero. Assume that potential new investors believe that the manager will raise new equity and invest in the new project, regardless of the true value of the existing assets. a. What share of the company value after investing in the project does the manager have to offer to the new external investors so that they finance the investment cost of 100? b. Assume that the current asset value of the company is 100. Does the manager raise new equity? c. Assume that the current asset value of the company is 20. Does the manager raise new equity?

that the current asset value of the company is 100. Does the manager raise new equity? f. Assume that the current asset value of the company is 20. Does the manager raise new equity?

Imagine that you are a financial manager researching investments for your client. Think of a friend or a family member as a client. Define their characteristics and goals such as an employee or employer, relatively young (less than 40 years) or close to retirement, having some savings/property, a risk taker or risk averter, etc. Next, use Nexis Uni at the Strayer University library, located at Nexis Uni, click on "Company Dossier" to research the stock of any U.S. publicly traded company that you may consider as an investment opportunity for your client. Your investment should align with your client's investment goals. (Note: Please ensure that you are able

Instructions

Your final financial research report will be 6-8 pages long and be completed in two parts. This assignment only covers the first part. This assignment requires you to use at least five quality academic resources and cover the following topics:

Rationale for choosing the company in which to invest. Ratio analysis. Stock price analysis. Recommendations. Refer to the following resources to assist with completing your assignment:

This exercise is designed to test your knowledge and skills in shopping for auto insurance and demonstrate how insurers price and underwrite this coverage. You may obtain quotes from r any other insurance company's website you prefer. You will be asked to provide certain information in order to obtain a quote. You should be prepared to answer the questions accurately. (One suggestion: You may want to create a new email for this project in order to avoid tons of emails later.) Please use the coverage provisions listed below when you are asked questions about the coverage you want. Finally, you must answer the questions about your shopping experience below and attach a PRINTOUT of ALL the quotes (2 quotes by 3 questions = 6 quotes in total) you received in PDF file. (You DO NOT need to really purchase an auto policy, and the school will not be responsible for your premiums. Please answer the questions below in your project report and they must be presentable and legible).

Underwriting Information:

Name:____________ Age: ____________ Year/Make/Model: ________

Coverage:

Liability Limits: 50,000/100,000/25,000 Medical Payments: $10,000 Uninsured/Underinsured Motorists: 50,000/100,000 Comprehensive Deductible: $500 Collision Deductible: $250 Decline any other coverage

1. What were the amount of the quotes you received from the insurance companies (you must obtain quotes from at least two insurance companies' website)? If the quotes you received differ, why might they vary (be specific)?

2. After you have received quotes based on the above coverage choices, change your comprehensive deductibles to $1000, collision deductible to $500, and obtain revised quotes. (1) How do the quotes change and why? (2) What are the costs and benefits of having low deductibles versus high deductibles?

3. Starting with the second quotes you received (i.e. with the $1000 comprehensive deductible and $500 collision deductibles), change your liability limits to 100,000/300,000/50,000 and your Uninsured/Underinsured limits to 100,000/300,000. (1) How do the quotes change and why? (2) What are the costs and benefits of the increase in policy limits? (3) How does the premium change of lower deductibles compare with the premium change of increased limits? Which one, deductible or coverage amount, is more expensive? (4) What does this imply about optimizing your expenditures on auto liability insurance (given a budget)?

(a) What is duration of your obligation? (b) Describe - step by step - how you would choose and manage the portfolio of 1-year and 10-year STRIPS to minimize the exposure to interest rate risk. 47. Bond underwriting. Bond underwriters agree to purchase a corporate client's new bonds at a specific price, usually near 100% of face value, and then attempt to resell the bonds to the public. The act of reselling takes some time. Underwriting fees increase with the maturity of the bonds. Provide an explanation for this pattern of fees. 48. You have just been given the following bond portfolio: Bond Maturity (yrs) Coupon rate (%) Holdings ($ million) A 2 7.00 10 B 5 7.25 20 C 10 7.50 20 D 20 8.00 10 Coupons are paid semi-annually. The current yield curve is flat at 6%. (a) What is duration for each of the bonds in your portfolio? (b) What is the duration of your total portfolio? (c) What is the percentage change in the value of your portfolio if the yield moves up by 20 basis points? 49. A U.S. Treasury bond makes semi-annual payments of $300 for 10 years. (The investor receives 20 $300 payments at 6-month intervals.) At the end of 10 years, the bonds principal amount of $10,000 is paid to the investor. (a) What is the present value of the bond if the annual interest rate is 5%? (b) Suppose the bond is observed trading at $11,240. What discount rate are investors using to value the bonds cash flows? (This discount rate is called the bonds "yield to maturity.") 50. A savings bank has the following balance sheet ($ millions, market values). Assets Liabilities Treasuries:$200 Deposits:$900 Floating rate mortgage loans:$300 Equity:$100 Fixed rate mortgage loans:$500 Total: $1,000 Total: $1,000 Fall 2008 Page 22 of 66 Durations are as follows: Treasuries 6 months Floating rate mortgage loans 1 year Fixed rate mortgage loans 5 years Deposits 1 year (a) What is the duration of the banks equity? Briefly explain what this duration means for the banks stockholders. (b) Suppose interest rates move from 3% to 4% (flat term structure). Use duration to calculate the change in the value of the banks equity. Will the actual change be more or less than your calculated value? Explain briefly. 51. Fixed Income Management: A pension fund has the following liability: A 20-yr annuity, that will pay coupons of 7% at the end of each year.(t=1...t=20). The pension fund's liability has a face value of 100. The yield curve is flat at 5%. (a) Calculate the PV and duration of this liability. (b) The same pension fund has the following assets: a 1-yr discount bond with face value 100, and a 20-yr discount bond which also has a face value of 100. Calculate the PV and duration of the portfolio of assets. (c) How would you change the portfolio composition of assets (keeping the PV of assets the same), so that the NPV of the firm, defined as P VA P VL, that is Present Value of assets minus the Present Value of liabilities, is unaffected by interest rate changes? (d) After making the change above in (c), what is the change in the NPV of the firm if interest rates increase by 10 basis points. 52. Three bonds trade in London and pay annual coupons Bond Coupon Maturity Price A 5% 1 100.96% B 6.5% 3 106.29% C 2% 3 93.84% Prices are in decimals, not 32nds. (a) What is each bond's yield to maturity? (b) What are the 1, 2 and 3-year spot rates? What are the forward rates?

53. Assume the spot rates for year 1, year 2 and year 3 are 3.5%, 4% and 4.5%, respectively. There are a 3-year zero coupon bond and a 3-year coupon bond that pays a 5% coupon annually. (a) What are the YTMs of the bonds? (b) Calculate all 1-year forward rates. (c) Calculate the realized returns of the two bonds over the next year if the yield curve does not change. (In year 1 the 1-year spot rate is 3.5%, the 2-year spot rate is 4% and the 3-year spot rate is 4.5%.) 54. A pension plan is obligated to make disbursements of $1 million, $2 million and $1 million at the end of each of the next three years, respectively. Find the durations of the plan's obligations if the interest rate is 10% annually. 55. A local bank has the following balance sheet: Asset Liability Loans $100 million Deposits $90 million Equity $10 million The duration of the loans is 4 years and the duration of the deposits is 2 years. (a) What is the duration of the bank's equity? How would you interpret the duration of the equity? (b) Suppose that the yield curve moves from 6% to 6.5%. What is the change in the bank's equity value? The term structure is flat at 6%. A bond has 10 years to maturity, face value $100, and annual coupon rate 5%. Interest rates are expressed as EARs. 56. (a) Compute the bond price. (b) Compute the bond's duration and modified duration. (c) Suppose the term structure moves up to 7% (still staying flat). What is the bond's new price? (d) Compute the approximate price change using duration, and compare it to the actual price change. 57. Suppose Microsoft, which has billions invested in short-term debt securities, undertakes the following two-step transaction on Dec. 30, 2009. (1) Sell $1 billion market value of 6-month U.S. Treasury bills yielding 4% (6 month spot rate). (2) Buy $1 billion of 10- year Treasury notes. The notes have a 5.5% coupon and are trading at par. Microsoft does not need the $1 billion for its operations and will hold the notes to maturity

58. The Treasury bond maturing on August 15, 2017 traded at a closing ask price of 133:16 (i.e., $133 16/32) on August 31, 2007. The coupon rate is 8.875%, paid semi-annually. The yield to maturity was 4.63% (with semi-annual compounding). (a) Explain in detail how this yield to maturity was calculated. (b) Discount the bond's cash flows, using the yield to maturity. Can you replicate the ask price? (The replication should be close but won't be exact.) Show your calculations. 59. The following questions appeared in past CFA Examinations. Give a brief explanation for each of your answers. (a) Which set of conditions will result in a bond with the greatest volatility? i. A high coupon and a short maturity. ii. A high coupon and a long maturity. iii. A low coupon and a short maturity. iv. A low coupon and a long maturity. (b) An investor who expects declining interest rates would be likely to purchase a bond that has a . . . coupon and a . . . term to maturity. i. Low, long. ii. High, short. iii. High, long. iv. Zero, long. (c) With a zero-coupon bond: i. Duration equals the weighted average term to maturity. ii. Term to maturity equals duration. iii. Weighted average term to maturity equals the term to maturity. iv. All of the above