Question One
(I) FIXED INCOME INVESTMENT
Tony worked for Hilton Hotels previously and ended his career on a high note, retiring as the CEO of Hilton Hotels. On the 31st December 2017, the board of directors proceeded an issue of a 10-year Hilton-Hotels corporate bonds with a coupon of 6.0% payable semi-annually and offered the chance to Tony to subscribe to it. The level of credit risk associated with the corporate bond is measured by using credit ratings given by credit rating agencies. The bond was rated by Moody’s rating agency and obtained a rating Baa3. Accordingly, Tony invested Rs10 million into the bond. While doing your research, your credit analysis team informed you that Hilton-Hotel corporate bonds may be downgraded to Ba1. He heard from a friend that he should only invest in investment grade bonds.
(a) Tony is not well versed with credit ratings. Prepare a statement to explain Moody’s credit ratings system to Tony, its importance on the international stage and the impact of a downgrade on the bond’s yields (interest rate) and credit risk. (10 Marks/ 300 words max.)
(b) Given that the bond is currently trading at a market interest rate of 4% (assume that today is the 31st December 2020 such that there are 7 years remaining till the maturity of the bond), what is the price of the bond? (5 Marks)
(c) In another scenario, market expectations point towards a cut in the Key Repo Rate (interest rate) to the tune of 50bps (0.5%) in 3 weeks’ time. Discuss whether Tony is better-off disposing of the bond immediately or should he wait for the cut in the Key Repo Rate and then sell the bond?
Question Two
Outline the risks associated with international investment. (10 Marks)
Describe the strategies that may be adopted by multinational companies with regard to country risk. (20 Marks)
Outline the risks associated with international investment. (10 Marks) Describe the strategies that may be adopted by multinational companies with regard to country risk.
Question Three
Assume b=0.05b=0.05 is a constant for all ii in the BDT model as we assumed in the video lectures. Calibrate the a_iai? parameters so that the model term-structure matches the market term-structure. Be sure that the final error returned by Solver is at most 10^ {-8}10-8. (This can be achieved by rerunning Solver multiple times if necessary, starting each time with the solution from the previous call to Solver.
Once your model has been calibrated, compute the price of a payer swaption with notional $1M that expires at time t=3t=3 with an option strike of 00. You may assume the underlying swap has a fixed rate of 3.9\%3.9% and that if the option is exercised then cash-flows take place at times t=4, \dots , 10t=4,…,10. (The cash-flow at time t=it=i is based on the short-rate that prevailed in the previous period, i.e. the payments of the underlying swap are made in arrears.)
Submission Guideline: Give your answer rounded to the nearest integer. For example, if you compute the answer to be 10,456.67, submit 10457.
Question Four
In Question 9, would it make any difference if Schwartz’s bank had confirmed the letter of credit and paid the promissory note before Rousseau learned of the supposedly defective shipment?
Question 9
Rousseau et Fils has signed a contract to buy 10,000 “new coffee percolators in the manufacturer’s original packaging, with standard manufacturer’s warranty,” from Schwartz, GmBH. Schwartz agrees to ship the percolators CIF, and Rousseau agrees to make payment by means of an irrevocable letter of credit. Rousseau contacts Thermidor Bank, which issues a letter of credit promising to honor a promissory note payable to Schwartz when it is accompanied by an invoice and a clean, on board bill of lading for “10,000 new coffee percolators in the manufacturer’s original packaging, with standard manufacturer’s warranty.” Rousseau learns from Weiss, a competitor of Schwartz, that even though Schwartz had obtained actual bills identifying the goods as “10,000 new coffee percolators in the manufacturer’s original packaging, with standard manufacturer’s warranty,” the percolators were actually used and inoperable.
Question Five
Consider a 11-period binomial model with R=1.02R=1.02, S_0 = 100S0? =100,
u=1/d= 1.05u=1/d=1.05. Compute the value of a European call option on the stock
with strike K=102K=102. The stock does not pay dividends.
Question Six
What would you be willing to pay (given that you could live forever, and hence could receive all the cash flows) for a preferred share of stock in the University of Pittsburgh, that promises you to pay a cash dividend to you at the end of the year of $25, which will increase every year by 1%, forever. The interest rate is fixed at 4.75%. What would you be willing to pay if the share of stock paid out its first $25 right now, and everything else being the same?
Question Seven
A firm wants to open a new coal mine. The price of coal is very volatile and the projected profits over the next five years are : Rs. 100,000 , Rs. 250,000 , Rs. 10,000 , Rs. 200,000 and Rs. 50,000 respectively. After that profits will be a constant Rs. 150,000 per year for next 20 years at which time the mine closes. If 7% is the appropriate discount rate for the first five years and is 8% after that, what is the present value of the mine? Ans: 1,558,234.4
Question Eight
Read ALL of the sections of this article, including:
• What is an annual report to shareholders? • What are the purposes and objectives for the Annual Report to Shareholders?
• How should the annual report be read? For what, precisely, should the reader search?
• Why does the annual report include an Opening Letter from the Chairman or CEO to shareholders?
• What is the annual report Operating Review?
• Why does the annual report present “Market Strategy and Market Conditions?”
• What is the purpose of the Annual Report Management Discussion and Analysis?
• Which Financial Statements and Notes always appear in the Annual Report?
• Financial statement highlights
• Income statement
• Balance sheet
• Statement of changes in financial Position (SCFP, or Cash flow statement)
• Retained earnings statement • 10–20-year economic history
• Notes on financial statements
• What is the required Auditor’s Statement and why is it presented in the Annual Report?
• How is corporate governance presented? How are company directors, and officers identified?
• What is the US Form 10-K, UK Form AR01, Canadian AIF? Next, use a search engine to research how to read an annual report. Using your readings as a guide, write a guide to a novice investor entitled: “A Novice’s Guide to Reading an Annual Report.” Your guide must be at least 1000 words (following current APA guidelines) in a format and in language appropriate for a novice investor. Submit your guide by 11:59 p.m. (ET) on Sunday of Module/Week 2.
Question Nine
Question 1
This question is to be completed in the “TVM” worksheet. Your answers should be entered into
this worksheet and a Word document, as appropriate. Clearly label your answers.
You wish to accumulate a sum of cash equal to the year of your birthday, followed by the value of
the first letter of your first name and surname. In other words, if you are Andrew Benn and you
were born in 1996, you wish to accumulate $199 612.
Assume the interest rate is 4.xy% where x is the integer of the average of the last three digits of your
student ID and y is the integer of the standard deviation of the last three digits of your student ID.
In other words, if your ID ends with the numbers 123, then x = 2 and y = 1, so the interest rate is
4.21%. The interest rate is a continuously compounding annual rate.
The length of time you will invest your cash is equal to z where z is the product of the 2nd letters of
your first name and surname. If your first name starts from A to M, then you will be investing for z
quarters, otherwise you are investing for z half-years.
Your job is to determine how much you need to have today in order to reach that goal.
Carefully label your answers to the following questions.
a.) How much will you be needing to accumulate?
b.) What is the annual interest rate?
c.) How long will you invest the cash for?
d.) What is the amount you will need to invest today to achieve your goal, giving your answer
correct to the nearest cent?
e.) How much would you need to deposit at the start of each month in order to meet your goal?
(Research how an annuity is calculated with continuously compounding interest rates).
Question Ten
Supposing that we are told that PERF has allocated $650 million principal in U.S stocks to two active managers who are equally good with each manager receiving the same amount of $325 million. The managers ran portfolios with volatility of 15.8% and correlation of 0.81 with each other. Compute the total risk budget. Assume that a=2.33.
A $261.947
B $307.148
C $227.641
D $321.049