Assignments
Haskayne School of Business
University of Calgary
443 Securities and Investments Analysis
Assignment 3
Miguel Palacios
Fixed Income Securities and Valuation
Please submit a short write-up (a spreadsheet is fine) performing the following
analysis. Use the data from the file in D2L, which has data on the yield curve (more
precisely, the zero-coupon yield curve) from 1985 to 2020. I encourage you to try
to work it out by yourself, and then discuss it with your classmates.
1. Suppose its December 1989 (the Wall had just came down, Milli Vanilli was all the
age, Freddie Mercury was alive, and yours truly was practicing for the local
precursor to the X Factor, where his band was finalist with a cover of Close to Me
and original work that sounded like grunge before grunge was a thing, though, of
course, Nirvana and the like where doing it on purpose, we were just
incompetent1…so so
y for people who had not been born then, they just don’t
know what they missed). You are looking into a new 30-year bond—its first
payment will take place in December of 1990, the last in December 2019—that the
US government is about to issue.
a. Find the coupon rate that the bond should be issued so that it starts trading
as close to par as possible, given that coupon rates change in .125%
increments (i.e., there are 2.5% coupon rates, 2.625% coupon rates, but no
2.55% coupon rates).2
. Find the price of this particular bond in December of every year,
immediately after the payment for that year has taken place.
c. Find the Yield-to-Maturity of this bond in December of 1989 (when issued)
and in December of 2004 (immediately after the payment for that year).
d. Find the return an investor would have obtained every year between each
December (starting in 1989 through XXXXXXXXXXHint: don’t forget to include the
payment they received each year!)
e. Suppose an investor started with $1,000 invested in this bond in 1989, and
that each December it reinvests all proceeds to buy more units of this bond.
How much money would they end up with by December 2019?3
f. Suppose an investor started with $1,000 invested in this bond in 1989, and
that each December it reinvests all proceeds to buy more units of this bond.
What would have been the average return and volatility of its investment
through December 2004? What about its Sharpe ratio?
1 We lost to this song by some of my high school classmates, which was definitively a song worthwhile
losing to. The lead singer went on to become one of Colombia’s better-known artists. Here’s a recent song
elease.
2 In reality one wouldn’t have the data for the 30-year yield before issuing the 30-year bond (you would
only have the yield curve up to 29 years), but let’s just ignore that for our exercise.
3 Back then you wouldn’t be able to buy fractions of a bond, but let’s assume our investor can.
https:
www.youtube.com/watch?v=BqGnUwoeb9U
https:
www.youtube.com/watch?v=HSQE0ZCqC68
https:
www.youtube.com/watch?v=HSQE0ZCqC68
2. To answer the next two questions, download the latest financial statements for
Chipotle (from here search for Chipotle, then select Chipotle, then pick the
interactive data for the latest 10-K form—that would be for the year 2019, issued
in Fe
uary of 2020—and then click on “View Excel Document”, which appears
just below the name of the firm).
a. Calculate Chipotle’s average ROE and plowback ratios for the two most
ecent years available in the 10-K file.
. Calculate Chipotle’s EBITDA for the two most recent years available in
the 10-K file.
c. What was Chipotle’s Enterprise value/EBITDA multiple on the date the
last EBITDA was made public? (You can assume it to have been the day
Chipotle filed its most recent 10-K.)
d. Using the Free Cash Flow model to value Chipotle, what would Chipotle’s
equity value (total, and per share) be based on the cash flows reported on
its most recent 10-K (you can find this in the consolidated statement of
cash, taking the net cash from operating activities and the net cash from
investing activities, ignoring net cash from financing), assuming that
Chipotle’s free cash flows grow at rate of 10% for 10 years, and after that
1% in perpetuity?
https:
www.sec.gov/edga
searchedga
companysearch.html