Solve the following problems. To receive full credit: fi) answer the problem correctly, £) answers should be clearly indicated by placing a square box around the number, 3) answer all problems on the problem set with supporting calculations.  If computer output is used, attach 8.† by fifi" inch printout   as supporting documentation, 4) put your name on the front cover sheet. Do not fold. †) hard copies must be handed to 4 pm on the last day of class. I will not accept files attached to emails.

If you follow all instructions exactly. No partial credit. 

1.Computimg Bomd Prices, IÆÆ amd Duratiom  

a.ABG bond is a £0-year bond with face value 8fi000. The coupon payment is 8£† per 6 months. The semi-annual yield is 4%. Use the PV function in Excel (or equivalent) to find the price of the bond. Note that the entry FV in the Excel PV function is the maturity, or face value of the  bond.

b. Use the inputs as in the first part, but let semi-annual yields range from fi% to 6%. Plot the prices of the bonds.

c. Gompute the internal rate of return (IRR) on a £0-year bond with face value 8fi000, coupon payments of 8£† per six months and a current price of 89t†. Use the IRR function in Excel (or  equivalent).

d.Gompute the duration of the bond in part  a). 

2.The Term Structure 

Gonsider the following spot bond prices. The bond matures at 8fi000. Fill out the table for spot  and forward rates.

1.   Exercise im FactSet

·Find five comparables for Bank of America (BAG)

·Find the GEO of BAG and five comparable companies,For BAC amd all firms, find:

·Market value, alpha and beta (prices tab),

·ROE for £0fi0 (financials tab, then ratios),

·The estimated price to earnings ratio for £0fifi(estimates tab)

·Long Term Growth (%) (snapshot  tab)

·Average analysts rating (snapshot tab)

·Alpha (prices tab)

Beta

Fill in your answers in the following table:                  

GEO
BAG                G

 Mkt Value (8Millions) ROE for £0fi0

Est P/E for £0fifi (%) Long Term Growth(%) Average Analyst‘ Rating

†£ Week Alpha 

†£ Week Beta

k. Plot volume and price for BAC for last year and annotate all insider trading activity and earnings announcements. (separate sheet).

1.   Growth Model

Ajax paid a dividend of 8£.00 last year. Dividends are expect to grow at 9% for the next five years,% for the following two years and 3% thereafter.  Ajax‘s cost of capital is 9%.

a. Galculate the dividend stream for the next seven years. 

Dfi = D2 = D3 = D4 = D5 = D6 =Dt = 

Pt  = 

b.      Galculate the value (price) of Ajax stock (PO). 

PO = 

c.     Galculate the price of Ajax stock after three years (P3). 

P3 = 

4.      Optiom Values 

a.        Use the Black-Scholes model to compute the price of a one year at-the-money call option on the S&P †00 index assuming the risk-free rate is 3%, the continuous dividend yield is £% and the S&P index is at 8fi£00. The volatility of the S&P †00 index is 30% per annum. The payoff on this option is fiOO m Mas(O, ST — K). Assume the option is European.

b.Gompute the price of a one year put option, as in a). 

5. Imtermatiomal Imvestmemts 

Gonsider an investment in the Royal Bank of Ganada (RBG). Denote the Ganadian dollar by C8. Suppose C8fi = 8fi.O† and suppose RBG stock price is C8£†. Thus eO = fi.O† and pO = £†. After one year, the local stock price has appreciated to C8£8 and the currency has value C8fi = 8O.9O.

a.    What is the price of the 8 after one year?

fi

efi 

a.    What is the local return on on the Royal Bank of Ganada stock? 

rc8 = 

b.    What is the return on the Ganadian currency, G8. 

efi—eO eO 

c.    What is the total 8 return on an invest ment in the Royal Bank of Ganada  Stock?

r8 = . pfi . . efi . — fi

O           eO