INSTRUCTIONS
I. SHOW WORK
II. YOUR GRADE IS BASED ON THE ELABORATION, ELUCIDATIO, CONVICTION AND CORRECNESS OF YOUR ANSWERS.
III. YOU OUGHT TO DO 5 PROBLEMS. MOREOVER, YOU SHOULD DO 2 ADDITIONAL QUESTIONS FROM EITHER PROBLEMS OR ESSAYS. TOTALLY, YOU HAVE TO DO SEVEN QUESTIONS. EACH IS WORTH 14 POINTS.
A.PROBLEMS.
1. The Z score is 2. The values of X1, X2, X3, X4 and X5 are respectively .1, .3, .4 , .2 and you have to compute the last one. Explicate the meaning of the different determinants of the Z score. Will this company default?
2. Compute the duration of a 30 year 9% bond, if yields to maturity are 6% presently. If rates drop by 1%, how much will the price change? What if rates dropped by 2%? Which is more accurate? Why? Ascertain that you compute both the exact price and the approximate price by using duration.
3. We have a 7%, 40 year bond. We buy it now at which point market yields are 7%. Interest rates rise substantially to 12% per annum. Its convexity is 30.
a. Derive the price alteration by using both duration and convexity. Explain convexity.
b. Also, find the exact price. Compare the two cases.
c. What strategies will enable us to attain a higher rate of return and protect the value of the portfolio more?
4. Answer problem #14 on page 689.
5. There is a bond which has a duration of 7 and a convexity of 40.
a) If the bond increases by 3 %, what will its price alter by?
b) If it decreases by 3%, what will the alteration of price be?
c) Discuss without derivations. Are the true results symmetric in the 2 cases?
6. We are considering investing in one of the following two bonds. The one is a 2 year, 7% versus one which is 25 year, 3% bond. Which shall we choose, if we predict that market rates will rise from 10% to 12 % in the future one year? Compute the exact amount more we shall make by investing in the right one. .
7. We have the following information. The debt to assets, average collection period, ITO, net profit margin and return on equity are .70,60 days, 2 times, 9% and 18% respectively for a company, while they are .45, 30 days, 6 times, 5% and 11% for the industry. Evaluate the company’s prospects.
B.ESSAYS
1. Explicate Professor Beaver’s metrics of forecasting bankruptcy.
2. Talk on the determinants of duration. If rates were to rise drastically, how would you use those determinants to protect the value of the portfolio?
3. Expound on the critical factors influencing high yield bonds according to Jane Howe.
4. Discuss 4 qualitative variables, which affect the rating of regular bonds