Finance473DebtandMoneyMarket
Problemset1withsolutions
AndreiSimonov
I.TimeValueofMoney
1. In the market, highly rated corporate bonds are providing a 2% higher return than
comparableTreasurysecurities.Doesthismeanthatthecorporatesecuritiesarebetter
invest
FIN 473: Final Exam
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Instructions:
1. Print your name and student number in the spaces provided above.
2. The examination consists of 7 pages plus the formula sheets.
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Finance473DebtandMoneyMarket
Problemset2withsolutions,
AndreiSimonov
1.Considerthefollowingthreebondswithsemiannualcouponfrequencyand$1000facevalue.
Bond Price Couponrate(%)
Termtomaturity
F
884.20
7
5
G
948.908
7
H
967.70 9
4
Foreachofthethreebonds:
a. D
Review session 2014
Andrei Simonov - debt and
money markets
1
Some basic calculation
x
The present value of annuity that pays $1 each period
An r
1
1
1
.
(1 r )1 (1 r ) 2
(1 r ) n
1
1
1
r (1 r ) n
where r is the discount rate and n is the number of
Norfolk Southern Century Bond:
1. Why did NSC reopen this issue to raise another $250M?
2. Do you think NSC is going to be around in 2105? Does this matter?
3. Who buys those century bonds?
4. Why dont we see more of these?
5. Under what conditions do you
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Example: A 10% coupon bond has one year to maturity. Its current price is $105. What is the yield to maturity? Face value is $100.
x
Solution1:
B
C F Po ) / M ]
[(
ARTM
b
( F P0 ) / 2
CouponperperiodC
F
P0
Numberofperiods
ARTMperperiod
ARTMannualized
5
1
Finance 473 Debt and Money Market
Problem set 2
2014
Andrei Simonov
Please upload your solution via Angel drop box. After submission please check if your solution
was indeed uploaded correctly. Damaged file cannot be graded. Late problem sets will not be
FI 473: Debt and money markets
Instructor: Andrei Simonov
Simonov@bus.msu.edu
Office: 321 Eppley
Tel: (517) 884 0455
Course webpage:
http:/angel.msu.edu
Andrei Simonov - debt and
money markets
1
Finance
x
x
Finance means, literally, borrowing
The borrowe
Agency and corporate debt
market
Andrei Simonov - debt and
money markets
1
Overview
x
x
Chapter 6, 7, and 20 of Fabozzi
Federal agencies and their debt
Corporate bond
Commercial papers
Medium term notes
Bond rating and high yield bonds
Risk and retu
Duration
Andrei Simonov - debt and
money markets
1
Why bother?
x
x
How to measure if two bonds have the same exposure to interest
rate risk?
Why do we care about price volatility?
x
Want to know the risk exposure
Know how yield changes affect the bond ret
(1). The present value of annuities
Ar = (1/(1+r)+(1/(1+r)+.+(1/(1+r) = (1/r)(1-(1/(1+r)
where r is the discount rate for one period, and n is the number of periods.
(2) The future value of annuities:
Fr = (1/r)(1+r)-1) = Ar(1+r)
where r is the discount r
Coca Cola Enterprise Notes:
a. What is YTM for CCE issue?
b. What are the differences w.r.t. MSFT note above?
c. What is default risk for CCE note?
d. Why is CCE raising funds?
1.
YTM=1.91% (2012)
YTM=2.20% (2015)`
2.
From Exhibit 1, the credit rating at