Question 1 -
Use the bonds from the excel file Bond exam data.xls to write a report for a client, including the following points:
a. A maximum two-page overview of the US corporate bond market (for one of the recent years, e.g. 2015 or first three quarters of 2016). Examples of what your report could include: the size of the market in comparison to government bonds, credit ratings, downgrades, performance or any similar issues that you find are relevant for your report.
b. Assume that you are managing a portfolio of bonds for a client. Select any 5 bonds from the excel sheet, covering a range of maturities from shorter to longer term ones. The settlement date is 23rd November 2016. Calculate modified duration, current yield and the yield to maturity for each of the 5 selected bonds. Present the results and briefly comment on these bond features to the client.
c. Assume the length of your client's investment horizon (e.g. 5 years) and the level of their required yield (e.g. 5% p.a.). Using the information for 5 selected bonds from b), immunise your portfolio from interest rate risk and reinvestment risk, while maintaining the level of the desired yield in your portfolio. Short-selling of bonds is allowed and your portfolio composition should be as realistic as possible. Explain: the choice of any short-selling restriction applied, the benefits of the investment strategy applied in this question and present your portfolio to the client.
Question 2 -
Cyclops Co. specialises in producing no-maintenance contact lenses. The earnings and dividend growth prospects of the company are disputed by two independent analysts. Zeta-Analytics is forecasting 5% growth in dividends indefinitely. However, SOL is predicting a 20% growth in dividends, but only for the next three years, after which the growth rate is expected to decline to 4% for the indefinite future. The dividend per share is currently £3 and stocks with similar risk are currently priced to provide a 14% expected return.
a. What is the intrinsic value of the stock according to Zeta?
b. What is the intrinsic value of the stock according to SOL?
c. Assuming that the stock is fairly priced and sells for £39.75 per share, what is the implied perpetual dividend growth rate? What is the implied P/E (price-earnings ratio) on next year's earnings, based on this perpetual dividend growth assumption and assuming a 25% payout ratio?
d. How do you interpret the price-earnings (P/E) ratio? What might a high P/E ratio indicate? How is the P/E used in valuing firms? Answer these questions using your own examples as illustrations.
Question 3 -
a. Companies A and B have been offered the following rates per annum on a $20 million 5-year loan:
Fixed rate
- Company A: 5.0%;
- Company B: 6.4%
Floating rate
- Company A: LIBOR + 0.1%;
- Company : LIBOR + 0.6%
Company A requires a floating-rate loan; company B requires a fixed-rate loan. Design a swap that will net a bank, acting as intermediary, 0.1% per annum and that will appear equally attractive to both companies. Explain your answer in detail and comment on the risks each participant in the swap is facing.
b. Discuss how the Credit Default Swaps contributed to the recent credit/financial crisis.
Attachment:- Assignment Files.rar