FIN417 Midterm Cheat sheet

FIN417 Midterm Cheat sheet - Large Cap Stock Funds: Invest...

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Large Cap Stock Funds: Invest in stocks of larger companies What country is best for equity investments : Country with lowest p/e ratio (more equity), growth opportunity Which is better: Investment grade Eurodollar Bonds vs. junk Eurodollar bonds right now: Eurobonds make pmts in $ outside of USA. First find the two yields and compare to the risk free rate for that amount of years. Get the actual spread (Bond yield- Risk free yield). 0.85 is the req spread for investment grade bonds vs 4.17 req spread for junk bonds. Compare each yields actual spread to their required spread and decide which is better. Exp. Whether large cap US stock like DJ are better investments than a diversified portfolio of liquid real estate companies with p/e of 28.5: Compare p/e, yields, and spreads, growth, and price to attain—DJ better A 90-day bankers acceptances for Ba borrowers are priced at 3.52%. How much cash would you have to pay for $7M in such paper and whether it represents a good investment now? 7M[1-[0.0352(90/ 360 ]= 6938000 (take par value times 1 minus quoted price deannualized) then, take [(7M/6938000)-1) to get return over 90 days. Take the return over 90 days and multiply by ( 365 /90) to get a rate of return. Take this rate and subtract the 90-day Rf rate to get actual spread and compare to required spread for Ba borrowers (3.09%) Credit default swaps on A-rated debt currently require an annual payment equal to 0.7995% of the principal or notational amount. Which side of the swap is optimal? 0.7995 is the actual spread, compared to required spread on A rated debt (1.03%). Buy the insurance, pay 79bp for something worth 103bp, take more risk with good payoff, if it was the other way around, then selling is the side to take Buy S&P500 spot or 1-month futures contract now? V futures contract = given month futures price*([1+(R f 1 month /12)]/ ([1+(Spot yield/12)] Compare the value of the futures contract to the price of the futures contract, if the value doesn’t exceed price, buy spot. Is 10-yr US gov bonds or 10-yr German gov bonds better investment now?
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This note was uploaded on 06/29/2011 for the course FIN 322 taught by Professor Zhu during the Spring '11 term at Oakland University.

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FIN417 Midterm Cheat sheet - Large Cap Stock Funds: Invest...

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