Questions:
1) Calculate the value of a bond with £100 face value, 5 years to maturity, coupon rate of 7% p.a. paid annually, when the discount rate (expected rate of return on similar instruments) is 4% p.a.
2) Calculate the value of a bond with £100 face value, 4 years to maturity, coupon rate of 6% p.a. paid semi-annually, when the discount rate (expected rate of return on similar instruments) is 8% p.a.
3) Buyer of a forward contract agrees to buy forward 1000 shares of Company X for £30 per share. There is a required initial margin of 10% with the same maintenance margin. What would be the margin payments (variation margin) if the price changes to 28, 34 and finally 38? What would be the total payoff in £s and in % to the buyer if the price increases to 40 at the end of the period?
4) You believe that stocks of company X, which are currently being traded at 250p per share, will decrease significantly in the near future, so you agree to sell them forward for 240p per share. You decides to exploit this opportunity by selling a future contract on 1000 shares of this company with a maturity of 3 months.
(a) What would the profit (loss) be if the shares rose to 280p by the end of the contract?
(b) What would the profit (loss) be if the shares fell to 220p by the end of the contract?
5) You believe that stocks of company X, which are currently being traded at 180p per share, will increase significantly in the near future, so you agree to buy them forward for 190p per share. You decides to exploit this opportunity by buying a future contract on 2000 shares of this company with a maturity of 3 months.
(a) What would the profit (loss) be if the shares rose to 210p by the end of the contract?
(b) What would the profit (loss) be if the shares fell to 170p by the end of the contract?
6) An investor is quite certain that Company X's share prices will increase significantly in the near future, so he purchases a call option contract on 1000 shares with a strike price of 140p per share at a premium of12p per share.
What are the profits (losses) going to be if the share price moves to 165p and 110p respectively at maturity?
Draw a graph showing the profits and losses at share prices ranging from 100p to 200p.
6) Assume that an investor holds 1,000 shares in Magnify Inc., and her shareholding is worth £2,480 (i.e. 248p per share). She purchases a put contract for 1,000 shares with a strike price of 230p and a premium of 25p per share. What will be her total profit/loss if the share price drops to 200p or increases to 260p?
7) An investor is quite certain that Company X's share prices will not increase significantly in the near future, but will eventually rise in price in the long run. He holds 2000 shares of this company but wants to hold these shares and also exploit the opportunity to earn some more money, so he writes a call option contract on 2000 shares with a strike price of 320p per share at a premium of27p per share. The current price of shares is 315.
What are the profits (losses) going to be if the share price moves to 360p and 305p respectively at maturity?
Draw two graphsseparately showing the profits and losses from the option for the writer and the buyer at share prices ranging from 200p to 400p (ignore the shares, just for the option).
8) You buy a share at £14. A year later, the share is valued at £18 in the market and you have already received a dividend of £1 during the year. What are you holding period return (in £s) and rate of return (in %)?
8) Imagine there is a stock with the following probabilities for different returns:
|
probability
|
return
|
|
20%
|
-5%
|
|
30%
|
0%
|
|
40%
|
10%
|
|
10%
|
20%
|
What are the ‘expected rate of return' and ‘standard deviation' for this stock?
If this stock's beta is 1.15 and the risk-free rate is 3 percent, what would be an appropriate required return for an investor owning this stock? Assume that market return is 8%.
9) You are considering a project with an initial cash outlay of $150,000 and expected free cash flows of $70,000 at the end of each year for 4 years. The required rate of return for this project is 10 percent.
a. What is the project's payback period?
b. What is the project's discounted payback period?
c. What is the project's NPV ?
d. What is the project's PI ?
f. What is the project's MIRR if the re-investment rate is 12 percent?
10) You have two projects, A and B. Both projects require initial investment of $3000. The required rate of return is 10%, and here are the cash flows for these two projects:
Project A = $1220 each in years 1-3
Project B = $950 each in years 1-4
Note that the two projects have different life-times. Which project would you chose based on the Equivalent Annual Annuity method?
Annuity Formula: Pan = (1- (1/(1+i)n))/i *A
11) We have the following information from a manufacturer:
Selling price = $12 per unit
Variable cost = $9 per unit
Fixed costs = $60,000
Determine the break-even quantity (in units) and break-even volume (in sales dollars) for this manufacturer.
What is the degree of operating leverage for a production and sales level of 25,000 units for the firm?