Capital Markets
Solutions to Problem Set #1 - undergraduate day sections
1. Cost = $20,375. Sale proceeds = $27,500. Return for half a year =
(27,500-20,375)/20,375 = 35% for half a year before tax. After tax
return is (1-0.34)*(27500-20375)/20375 = 23% f
Fin 3560
Spring 2013
Solutions to Problem Set 3
1.
You made $2/$40 dividend income and ($50 - $40)/$40 capital gain yield.
Total is $12/40 = 30%. For tax reporting we distinguish dividend income
from capital gain income. Those two forms of income are ofte
Fin 3560
Spring 2013
Solutions to Problem Set 2
1.
The cash flows of the bond that pays annual coupons will be only one
payoff, of $1100 at the end of the year. The one that pays semiannual
coupons will be $50 after six months, then $1050 at the end of th
Fin 3560
Solutions to Problem Set 5
1.
If the T-bill has face value of $1,000,000 the price would have been
$900,000. That is 10% less than $1,000,000. That is what discount yield
means.
Computing the yield the more normal way, you invested $900,000 and o
Capital Markets
Fin 3560 Solutions to Problem Set 9
1. a. The companys cost of equity capital must be
Ke = 6% + 1.5*(14% - 6%) = 18%.
b. Using the formula P/E = 1/(Ke g) gives
P/E = 1/(0.18 0.03) = 1/0.15 = 6.66
c. Stock price is $30. P/E is 6.66. Earning
Fin 3560
Solutions to Problem Set 6 about Coupon Stripping
Spring 2013
1.
a. The market price should be $1000.
b. If the yield curve remains unchanged for the next twelve months, youll
collect the coupon of $140 and then sell the remaining cash flows at t
Fin 3560
Solutions to problem Set 4
1.
This problem is intended to show that when you a buy a bond and sell it before it
matures, you might have a capital gain or a capital loss. Longer term bonds are more
vulnerable to capital loss and can also give you
Fin 3560
Solutions to Problem Set 7 about mortgages
1. The loan is 30 years, $80,000, 7%. The monthly payment that will
amortize the loan is $532.42.
2. Use Mort19 spreadsheet and Goal Seek. Vary the interest rate until the
monthly payment is $1100.65. Th
Fin 3560
Solutions to Problem Set 8 about Mortgages
1.
The existing mortgage was probably not the best deal that was available to
the homeowner, because five and a half years ago the market rate for a 30year mortgage was lower than 8.5%. But loans are oft
Fin 3560
Spring 2013
Solutions to Problem Set 11
1. a. The number of shares you got on Feb. 26, 2011 was $5000/
($15.17*1.03) = 319.99. Use the same approach to find the number of
shares you got on each subsequent date. $500/(15.71*1.03) = 30.89;
$1000/(1
Scenario
Mortgage Securitization Example
Sequential Pay Bonds
Babson College
Begin with 100 mortgages of $200,000 each
Each is 7%, 30 year fixed rate
One mortgage prepays every month.
There are senior bonds of $15 million face value and 6% coupon
and juni