Description of this paper

Loading

I got a question and please recheck the answer and edit it.Please-(Answered)

Description

Instant Solution ? Click "Buy button" to Download the solution File


Question

I got a question and please recheck the answer and edit it.Please include all workings.And highlight the answers in yellow.And Please answer this small questions.Thank you.

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% & 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% & 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 & # 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

Price : $19
SiteLock