Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Financial Management Expert

Section A: Case Study:

On the advice of some of its wealthiest alumni, Clare College has borrowed £15m on a 40-year inflation- linked loan. One year, as any beleaguered banker will tell you, is a long time in the markets. Banks crash, governments bail out and the landscape of the City shifts forever. But in the cloistered colleges of Cambridge University it’s a mere blip in financial history and the brightest academics in the land are banking on the good times rolling round once again.

Clare College, Cambridge is attempting to cash in on the current economic crisis by borrowing money for the first time in its 700- year history to take advantage of cheaper shares. On the advice of some of its wealthiest alumni, it has borrowed £15m on a 40 year inflation- linked loan, which, it hopes, will one day in the distant future reap a profit of £36m.

Only Oxbridge with its bulging endowment coffers could afford to squirrel away £15m over such a long period of time, as Donald Hearn, Clare’s bursar freely admits. “Because we have a very, very long term perspective – we’ve been around for 700 years and plan to be around for at least 700 more- we have the advantage of not worrying about short term thresholds,” he said. “We are putting the £15m away for 40 years and will not touch it for all that time.”

The college has borrowed the money at a real rate of interest of 1.09% to invest it in rock-bottom stocks and shares. The length and type of loan makes it the first of its kind for any British or American college, according to HSBC, who did all the work on the deal. Rather than a conventional loan paying back the same amount of money in 40 years plus interest, the inflation-linked loan means the college will have to pay back an estimated £70m in 2052 but with a projected profit of £36m.

“Because real interest rates adjusted for inflation are so unusually low it happened to be one of those occasions where we could borrow at 1.09% and it’s almost inconceivable that real returns on equities will average less than 1.09% over the next 40 years,” Hearn said.

Because UK institutions have been forced to match their long-term liabilities very closely, long-term inflation-linked yields in the UK are very low. The real yield on the 2052 I/L gilt is 0.8 per cent per year. The real yields on comparable I/L government bonds in the US and France are 3.1 per cent and 2.6 per cent respectively. Clare is borrowing at 1.09 per cent (including a cap on its nominal liability at 7 per cent inflation). One Independent City expert told the Financial Times: “They are almost bound to make money, when you allow for rises in equity prices and dividends over the next 40 years.” This belief is reinforced by Clare’s view that stock markets are now at or near their bottom.

Required:

problem a) Critically assess the theoretical and empirical evidence for the belief that ‘it’s almost inconceivable that real returns on equities will average less than 1.09% over the next 40 years’.

(Your answer should include reference to risk aversion and the equity risk premium). 

problem b) Critically assess the theoretical and empirical evidence for the belief that the strategy outlined in the case is less risky over the long run than it would be over a short period of time.

(Your answer should include reference to the arithmetic mean, geometric mean, and standard deviation in forecasting risk and return over different time periods; and the meaning and relevance to this particular case of ‘mean reversion’).
                            
problem c)
It is suggested in the case study that ‘stock markets are now at or near their bottom’ and ‘they are almost bound to make money’. In relation to these statements, with relevant data and evidence, discuss to what extent market timing is feasible using:

i) Reverse yield gap
ii) Tobin’s q
iii) PE ratios
iv) Charts, including moving averages

problem d) Discuss the theoretical and empirical arguments for Clare College including commodities as an additional long-term asset class.

Section B:

problem a) find out both Macaulay and modified durations of the 8-year, 8.5% coupon bond given a flat yield curve at 10%.

problem b) describe why zero coupon bonds have a higher Macaulay Duration than coupon paying bonds of the same return.                                                      

problem c) Comments on what is meant by the statement: “The financial markets are markets for loanable funds.”

problem d) Define the following international bonds and markets:

i) Eurobond Market
ii) Foreign Bond
iii) Internal Market or National Market
iv) External Market or Offshore Market
v) Interbank Foreign Exchange Market                                           

Section C:

problem a) Generate the price-yield curve for a zero-coupon bond with a face value of £100 and 260 actual days to maturity using the following annual yields: 4%, 4.25%, 4.5%, 4.75%, 5%, 5.25%, 5.5%, 5.75%, 6%, 6.25%, 6.5%, 6.75%, 7%, 7.25, 7.5%, 7.75%, and 8%. Use actual/actual day count convention.

problem b) Given a 10-year, 8% coupon bond with a face value of £100 and semi-annual coupon payments:

i) Generate the bond’s price-yield curve using annual yields ranging from 5% to 10% and differing by .5%.
ii) What is the price change when the yield increases from 8% to 8.5%?
iii) What is the price change when the yield decreases from 8% to 7.5%?
iv) Comment on the capital gain and capital loss you observe in b and c.
v) Comment on the features of the price-yield curve.

problem c) describe why the yield curve for lower quality bonds could be negatively sloped when the yield curves for other bonds are not.                                                             

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M9423
  • Price:- $70

Guranteed 36 Hours Delivery, In Price:- $70

Have any Question? 


Related Questions in Financial Management

1 which statement is falsea the wacc is the required return

1. Which statement is False? a. The WACC is the required return on the firm’s capital budgeting projects of average risk. b. Financial Risk is the additional risk resulting from the use of debt. c. According to the trade ...

Ub bank is considering to lend money to yale company yale

UB bank is considering to lend money to Yale company, Yale company's cash position, measured in millions of dollars, follows a generalized Wiener process will a drift rate of 3 per quarter and a variance rate of 4 per mo ...

You own 1800 shares of stock in avondale corporation you

You own 1,800 shares of stock in Avondale Corporation. You will receive a $1.80 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of $80 per share. The required return on Avondale sto ...

Megaware incorporated is a technology firm that was founded

Megaware Incorporated is a technology firm that was founded eight years ago by John Thompson and Jill Dillman. Megaware manufactures various hardware and software components. Its products are used in personal computers a ...

Quantum inc needs to raise 25 million to construct

Quantum, Inc. needs to raise $25 million to construct production facilities for a new model diskette drive. The firm’s straight non-convertible bonds currently yield 14%. Its stock sells for $30 per share; the last divid ...

The following are four customer accounts1 long 70000 march

The following are four customer accounts. 1. Long 70,000 March XYZ calls and long 6,000 March XYZ puts 2. Long 70,000 March XYZ calls and long 6,000 July XYZ calls 3. Long 70,000 March XYZ calls and short 6,000 July XYZ ...

1 what is true about preferred stockspreferred stock is

1. What is true about preferred stocks? Preferred stock is debt. Preferred stock is the same as common stock. Preferred stocks usually do not have votes. Preferred stock will always pay dividends yearly. 2. Stockholders' ...

Pine grove inc is a thriving young company and it expects

Pine Grove, Inc., is a thriving young company and it expects no dividends over the next 3 years because the company needs to reinvest its earnings to fund its various projects. The company will pay a $4.8 per share divid ...

You are going to invest in asset j and asset s asset j has

You are going to invest in Asset J and Asset S. Asset J has an expected return of 13.8 percent and a standard deviation of 54.8 percent. Asset S has an expected return of 10.8 percent and a standard deviation of 19.8 per ...

Locate the treasury issue in figure 63 maturing in november

Locate the Treasury issue in Figure 6.3 maturing in November 2044. Assume a par value of $1,000. What is its coupon rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 3 decimal pl ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro