FIN 401
Chapter 11: Managing Bond Portfolios
11.1 Interest Rate Risk
-Primary risk when entering into bonds is interest-rate risk
-There is an inverse relationship between bond prices and yields
-High
2/13/2017
Money and Banking
Chapter #6: The Risk and Term Structure
of Interest Rates
Overview
Risk structure of interest rates
Why different bonds with the same term to
maturity have different inte
3/1/2017
Money and Banking
Chapter #16: Central Banks and the
Federal Reserve System
Overview
Origins of the Fed
Structure of the Federal Reserve System
a. Federal Reserve banks
b. Member (commercia
Solutions to Chapter 6
Valuing Bonds
1.
2.
3.
The bond pays a coupon of 6.25%, which means annual interest is $62.50. The bond is
selling for 152.8203 = $1,528.203. Therefore, the current yield is $62
FIN 401
Chapter 4: Mutual Funds and Other Investment Companies
4.1 Investment Companies
Investment Companies: Financial intermediaries that invest the funds of individual
investors in securities or ot
Ch. 4: Mutual Funds and Other Investment Companies
Investment Companies
Investment companies: financial intermediaries that invest the funds of individual investors in
securities or other assets
- Mec
Chapter 15
Options
Derivative Securities
Financial derivative securities: derive all of part
of their value from another (underlying)
security
Equity derivative securities derive all, or
part, of th
Chapter 15
Options
Derivative Securities
Financial derivative securities: derive all of part
of their value from another (underlying)
security
Equity derivative securities derive all, or
part, of th
2/8/2017
Chapter #5:
The Behavior of Interest Rates
Overview
Our goal is to explain the behavior of interest rates
There are 2 competing theories that we will go
over in class:
1. Bond Market: The B
2/27/2017
Money and Banking
Chapter #9: Banking and the Management
of Financial Institutions
Overview
The bank balance sheet
Basic banking and T-accounts
General principles of bank management:
Liq
3/7/2017
Money and Banking
Chapter #17: The Money Supply Process
Overview
The Feds balance sheet
Control of the monetary base
Multiple deposit creation (the deposit multiplier)
Factors that determine
Chapter 22:
Investors and the
Investment Process
Overview of the Investment Process
Specify
objectives
Identify constraints
Formulate an investment policy
Monitor performance
Reevaluate and modif
Security Valuation and Analysis
Framework for Analysis
Analysis of the economy
Analysis of the industry
Analysis of the company
Influence of the Economy
Sales
Fiscal and monetary policies
Inflation
Chapter 7
Asset Pricing Models
Capital Asset Pricing Model
(CAPM)
Focus
on the relationship between the
risk and expected return on risky assets
Builds on Markowitz portfolio theory
Derived using p
Chapter 11
Bond Portfolios
Bond Pricing Relationships
Inverse relationship
between price and yield
Long-term bonds tend to be more price
sensitive than short-term bonds
As maturity increases, price
Chapter 4
Mutual Funds
Indirect Investing
Alternative to direct investment in or
ownership of securities
Refers to buying and selling shares of
intermediaries that hold portfolio
securities
Shares
Chapter 16
Option Valuation
Option Values
intrinsic value - profit that could be made if
the option was immediately exercised
Call: stock price exercise price
Put: exercise price stock price
Time va
Chapter 16
Option Valuation
Option Values
intrinsic value - profit that could be made if
the option was immediately exercised
Call: stock price exercise price
Put: exercise price stock price
Time va
Chapter 1: Investments Background and Issues
Investment: The current commitment of money or other resources in the expectation of
reaping future benefits.
-Example: Person purchases shares of a stock
Chapter 11
4. Change in Price = (Modified Duration Change in YTM) Price
= Change in YTM Price
Given the current bond price is $1,050, yield to maturity is 6%, and the increase in YTM
and new price, we
Chapter 10
5. Using a financial calculator, PV = 746.22, FV = 1,000, n = 5, PMT = 0.
The YTM is 6.0295%.
Using a financial calculator, PV = 730.00, FV = 1,000, n = 5, PMT = 0.
The YTM is 6.4965%.
7. T
Chapter 3
15.
a. The stock is purchased for $40 300 shares = $12,000.
Given that the amount borrowed from the broker is $4,000, Dees margin is the
initial purchase price net borrowing: $12,000 $4,000
Chapter 7
3. a. False. According to CAPM, when beta is zero, the excess return should be zero.
b. False. CAPM implies that the investor will only require risk premium for systematic
risk. Investors ar
Chapter 6
6.
a. Without doing any math, the severe recession is worse and the boom is better.
Thus, there appears to be a higher variance, yet the mean is probably the same
since the spread is equally
Chapter 5
5. Using Equation 5.6, we can calculate the mean of the HPR as:
= (0.3 0.44) + (0.4 0.14) + [0.3 (0.16)] =
E(r) =
0.14 or 14%
Using Equation 5.7, we can calculate the variance as:
Var(r) = 2
Chapter 4
18. Assume a hypothetical investment of $100. The end value of the investment will be equal
to I (1 front-end load) (1 + r true expense ratio)T
Loaded-Up
We add the 12b-1 fee to the operatin
Chapter 16
1. Intrinsic value = S0 X = $55 $50 = $5.00 Time value = C Intrinsic value = $6.50 $5.00 = $1.50 2. Using put-call parity: Put = C S0 + PV(X) + PV(Dividends) = $2.25 $33 + $35/(1 + .04)3/12
Chapter 1
Investments: Background
and Issues
Investments and Financial Assets
Essential nature of investment
Reduced current consumption
Planned later consumption
Real assets
Used to produce good
Chapter 14:
Financial Statement Analysis
Fundamental Analysis
Last step in top-down approach is
Fundamental analysis calls for the
estimation of intrinsic value
Value justified by fundamentals
Acco
Final Exam Study Guide Finance 401
Chapter 11: Bond Portfolios
I.
II.
III.
IV.
Interest Rate Sensitivity
a. Bond prices and yields are inversely related: As yields increase, bond prices fall,
as yield
Chapter 5
Return and Risk
Asset Valuation
Function
of both return and risk
At the center of security analysis
The
realized risk-return tradeoff: based off past
(Expost)
The expected risk-return tra
Chapter 10
Bond Prices and Yields
Bond Characteristics
Face or par value
Coupon rate
Zero coupon bond
Compounding and payments
Indenture
Bond Provisions
Secured or unsecured
Call provision
Con