hw3answer - Homework #3 Answer 1. Assuming a $100,000 par...

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1. Assuming a $100,000 par value, calculate the dollar price for the following Treasury coupon securities given the quoted price. (a) The quoted price for a $100,000 par value Treasury coupon security is 103-284. What is the dollar price? Thus, assuming a $100,000 par value Treasury coupon security with a quoted price of 103-284 the dollar price is: 103 + 28/32 + 4/256 = 103 + 0.875 + 0.015625 = 103.89063 per 100 of par value. The dollar price is: 103.89063 ($100,000 / 100) = $103,890.63 . (b) The quoted price for a $100,000 par value Treasury coupon security is 105-059. What is the dollar price? Thus, assuming a $100,000 par value Treasury coupon security with a quoted price of 105-059 the dollar price is: 105 + 5/32 + 9/256 = 105 + 0.15625 + 0.0351562 = 105.19141 per 100 of par value. The dollar price is: 105.19141($100,000 / 100) = $105,191.41 . 2. What arguments are offered for investing in nondollar bonds? There are three reasons given for investing in nondollar bonds. These are described below. A first reason for investing in nondollar bonds concerns the notion that diversification maximizes return for a given level of risk. Modern portfolio theory states that the most efficient portfolio, the market or world portfolio, contains all assets and is perfectly diversified. This portfolio is risky but generates the highest possible return for its risk level. If investors want to achieve higher returns they must invest in this portfolio. If their preference is to receive higher returns then they must allocate a portion of their total investments to purchasing this risky world portfolio, which includes nondollar bonds. A second reason (offered for a U.S. investor to invest in nondollar bonds) is the increased opportunities to find value that multiple markets provide. The argument is that nondollar bond investments—with the currency hedged—permits investment strategies based on interest rate changes in various countries. This provides additional dimensions to the actual investment decision or a broader range of investment choices. A third reason (given for nondollar bond investing) is to make what is referred to as an ―active play.‖ This involves investing in nondollar bonds but also making a decision not to hedge the currency component. 3. Explain why the higher the loan-to-value ratio is, the greater the credit risk is to which
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This note was uploaded on 12/02/2009 for the course FIN 4243 taught by Professor Dudley during the Fall '08 term at University of Florida.

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hw3answer - Homework #3 Answer 1. Assuming a $100,000 par...

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