Investment Analysis Assignment In Tutorial Library

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TITLE: Investment Analysis Assignment

CLASS / COURSE: Investment Analysis



1. “All things being equal, a 20 year maturity bond with an 8% coupon rate has a lower convexity than a 20 year bond with a 12% coupon. ” Is this statement true or false? Explain your answer. [5]
2. Assume you sell short 100 shares of common stock at $45 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $40/share? The stock paid no dividends during
the period, and you did not remove any money from the account before making the offsetting transaction. [5]
5. Consider two bonds, A and B. Both bonds are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, then both bonds will increase in value, but bond A will increase more than bond B. (All rates are annualized and all compounding is semi–annual). Is this statement true or false?[5]
7. Suppose returns are generated by a one factor model so ri = rf + β ∗ factor+error. Suppose that Portfolio A has a beta of 1.0 on the factor and an expected return of 11% and portfolio B has a beta of 2.0 on the
factor and an expected return of 17%. Assume that the risk-free rate is 6%. Can you make money, and if so, how? (Be specific). [5]
8. Holding maturity fixed, the modified duration of a zero coupon bond decreases with yield to maturity. Is this statement true? Explain your answer. [5]
10. If the M2 measure is zero for an investment portfolio, then the portfolio is a bad investment. Is this statement True or False? Explain. [5]
1. Consider the following three bonds: Bond A is a 1.5 year 10% coupon bond and current costs $82; Bond B is a 6 month, 20% coupon bond that costs $99, while Bond C is a 1 year 12% coupon bond that costs $90.20.
(a) Solve iteratively for the discount factors; i.e., the price today of money in 6 months, 1 year and 1.5 years. [5]
(b) Suppose that you have entered into a swap. No, this is not really a swap question. What is the present value of the fixed payments if the swap has 1.5 years to go and is set at 15% (annual rate, half of which is paid semiannually); on a notional principle of $1 million. [5]

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