Final_Exam_spring08

# Final_Exam_spring08 - Question 1 Once again there was a...

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Question 1 Once again there was a casting error at the Fixed Income Division at Rosario, Cho and Lang. The trainee hired over the summer to compile information on the different bonds in the market was not able to complete his job. The managers in the Firm asked you if you could clean up another mess. a) Please complete the following table. This information refers to bonds that pay a single annual coupon. Maturity Price Coupon Rate Yield to Maturity 1 \$950.00 0.00% ???? 2 \$981.79 ???? 6.50% 3 ???? 8.00% 7.50% b) (extra credit) In this class we only priced Bonds that had just paid the last coupon. In other words, all the bonds were 6 months (in the case of semi-annual coupons) or 12 months (in the case of annual coupons) from paying the next Coupon. That is obviously not always the case. You can be considering the purchase of a Bond sometime after the last Coupon was delivered. What is the price of the last bond in the table, 9 months from now? Assume the yield to maturity is still 7.5%.

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Question 2 One of your new international clients is the Bonn Institute of Technology. You are advising Professor Markus Ansmann how to invest the Funds his Department has. He just fired his old team of financial advisors because he is very unhappy with their service. In January 1 st his old financial advisors created a Fund for Professor Ansmann with total value of \$50,000,000 Asset Value Treasury Bills \$20,000,000 Stock Portfolio \$30,000,000 According to his former financial advisors, the two set of assets had this risk and return characteristics Asset Expected Return Standard Deviation Treasury Bills 5% 0% Stock Portfolio 15% 10% By the end of the year, in December 31 st , the portfolio had earned \$1,000,000 in Coupons from the Treasury Bills and \$5,000,000 in dividends from the Stock Portfolio. However, while the value of the Treasury Bills suffered no change, the value of the Stock Portfolio decreased from \$30,000,000 to \$24,000,000, due to a drop in share prices. a)

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Final_Exam_spring08 - Question 1 Once again there was a...

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