Q1: An inflation-indexed Treasury bond has a par value of $5,000 and a coupon rate of 7 percent. An investor purchases this bond and holds it for one year. During the year, the consumer price index decreases by 1.5 percent first six months of the year, and by 2.25 percent during the second six months of the year due to a deflation. What are the total interest payments the investor will receive during the year?
Q2: Go to finance.yahoo.com/bonds and click on "Composite Bond Rates." Compare the rate of a 10-year Treasury bond to a 10-year municipal bond. Which type of bond would offer you a higher annual yield based on your tax bracket, given that the municipal bond is not subject to federal income taxes?
a. Determine the premium contained in the yield of a 10-year corporate A-rated bond as compared with the 10-year Treasury Bonds
b. Compare that the premium that existed one month ago. Did the premium increase or decrease?
c. Offer an explanation for the change. Is the change attributed to economic conditions?
Q3: Ash Investment Company manages a broad portfolio with this composition:
|
Par Value
|
Present Market Value
|
Years Remaining to Maturity
|
|
Zero-coupon bonds
|
$200,000,000
|
$63,720,000
|
12
|
|
8% Treasury bonds
|
300,000,000
|
290,000,000
|
8
|
|
11% corporate bonds
|
400,000,000
|
380,000,000
|
10
|
|
-
|
-
|
$733,720,000
|
-
|
Ash expects that in four years, investors in the market will require an 8 percent return on the zero-coupon bonds, a 7 percent return on the Treasury bonds, and a 9 percent return on corporate bonds. Estimate the market value of the bond portfolio four years from now.
Questions 4, 5, and 6; Go to giddy.org/db/corpspreads.htm. the spreads are listed in the form of basis points (100 basis points = 1 percent) above the Treasury security with the same maturity.
Q4: First determine the difference between the AAA and CCC spreads. This indicates how much more of a yield is required on CCC-rated bonds versus AAA- rated bonds. Next, determine the difference between AAA and BBB spreads. Then determine the difference between BBB and CCC spreads.
a. Is the difference larger between AAA and BBB or the BBB and CCC spreads?
b. What does this tell you about the perceived risk of the bonds in these rating categories?
Q5: Compare the AAA spread for a short-term maturity (such as two years) versus a long-term maturity (such as 10 years).
a. Is the spread larger for the short-term or the long-term maturity?
b. Offer an explanation for this.
Q6: Next, compare the CCC spread for a short-term maturity (such as two years) versus a long-term maturity (such as 10 years).
a. Is the spread larger for the short-term or the long-term maturity?
b. Offer an explanation for this.
c. Notice that the difference in spreads for a given rating level among maturities varies with rating level that you assess. Offer an explanation for this.
Q7: Go to http://finance.yahoo.com/calculator/real-estate/hom03/?bypass=true Assume a loan amount of $120,000, an interest rate of 7.4 percent, and a30-year maturity. Given this information , what is the monthly payment?
a. In this first month, how much of the monthly payment is interest and how much is principal?
b. What is the outstanding balance after the first year?
c. In the last month of payment, how much of the monthly payment is interest and how much is principal?
d. Why is there such a difference in the composition of the principal versus interest payment over time?
Q8: Review the "Corporate Borrowing Rates and Yields" table in a recent issue of The Wall Street Journal (or a similar paper) to determine the Treasury bond yield. How do these rates compare to the Fannie Mae yield quoted in the Journal's "Borrowing Benchmarks" section? Why do you think there is a difference between the Fannie Mae rate and Treasury bond yields?