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Question 1 :If you decided to hold a 1-stock portfolio, and consequently were exposed to more risk than diversified investors, could you expect to be compensated for all of your risk; that is, could you earn a risk premium on that part of your risk that you could have eliminated by diversifying?
Q-1

Particulars

Year

Year-1

Year-2

Year-3

Year-4

Total Present value

0

1

2

3

Present Value

factor of 10%

1.0000

0.9090

0.8264

0.7513

Amount

Present Value

(\$50.00)

\$100.00

\$75.00

\$50.00

(\$50.00)

\$90.91

\$61.98

\$37.57

\$140.46

Q-2

Nominal Rate (Annual) = 11.33463%

Nominal Rate (day basis) (i) = 11.33463% x 1/365 = 0.03105%

a) Amount in A/c on 1st October:Number of days amount is invested in account (t) = 274

Amount in the account on the date 1st Oct = Amount Invested at day 0 x Future Value factor of

0.03105% for 274th day

= \$100 x 1.088786 = \$108.88 (Approximately)

b) Amount in account after 9 months:Number of days amount is invested in account (t) = 273 (January to September)

Amount in account after 9 months = Amount Invested at day 0 x Future Value factor of 0.03105% for

273rd day

= \$100 x 1.088449 = \$108.8449 or \$108.85

Q-3 (using hit and trial method)

a) If Issued at \$887.00

Let YTM be 11%,

At YTM, NPV of cash inflows is equal to issue price

NPV = (\$887) + (90 x 5.91113* + 1000 x 0.355 #)

= -\$887 + \$530.03 + \$352.18

= (\$4.78)

Now Let YTM be 10%

NPV = (\$887) + (90 x 6.14457* + 1000 x 0.38554 #)

= -\$887 + \$553.01 + \$385.54

= \$51.55

Now through interpolating between 11% &amp; 10%

YTM = 10% + 1%{51.55/(51.55-(-4.78))}

= 10% + 1% (51.55/56.33)

= 10% + 0.915143

= 10.91514% (Approx.)

b) If Issued at \$1,134.20

Let YTM be 8%

NPV = -\$1,134.20 + (90 x 6.71008* + 1000 x 0.46319 #)

= -\$1,134.20 + \$463.19 + \$603.19

= (\$67.10)

Now Let YTM be 7%

NPV = -\$1,134.20 + (90 x 7.02358* + 1000 x 0.50835 #)

= -\$1,134.20 + \$508.35 + \$632.12

= \$6.27

Now through interpolating between 7% &amp; 8%

YTM = 7% + 1%{6.27/(6.27-(-67.10))}

= 7% + 1% (6.27/73.37)

= 7.08546% (Approx.)

From the above analysis it can be seen that in case of bond issued at discount has a Yield higher than

the coupon rate and in case of premium bond Yield is lesser than the coupon rate.

(* denotes cumulative present value factor for 10 years &amp; # denotes present value factor for 10 years)

Q-4

a) If Issued at \$887.00

Capital Gain yield = 1000/887 ? 1 = 12.74%

Curr. Yield = \$90/\$887 x 100 = 10.15%

Total Return on bond = Income Return + Capital Gain Return

= \$90*10 + 1000-887

= \$1,013

b) If Issued at \$1,134.20

Capital Gain yield = 1000/1134.20 ? 1 = (11.83%)

Curr. Yield = \$90/\$1134.20 x 100 = 7.94%

Total Return on bond = Income Return + Capital Gain Return

= \$90*10 + 1000-1134.20

= \$765.80

Paper#9210839 | Written in 27-Jul-2016

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