This paper circulates around the core theme of . The discount yield on a T-bill is 5%. What is the price of the bill if it matures in 60 days and has a face value of $10,000? together with its essential aspects. It has been reviewed and purchased by the majority of students thus, this paper is rated 4.8 out of 5 points by the students. In addition to this, the price of this paper commences from £ 99. To get this paper written from the scratch, order this assignment now. 100% confidential, 100% plagiarism-free.
MULTIPLE CHOICE: [10 marks= 1 mark each]
- The value of a derivative security…
a) depends on the value of the relative primitive security
b) affects the value of the related primitive security
c) is unrelated to the value of the related primitive security
d) has been enhanced due to the recent misuse and negative publicity regarding these instruments
e) is worthless today
2. The discount yield on a T-bill is 5%. What is the price of the bill if it matures in 60 days and has a face value of $10,000?
a) $9,500.00
b) $9,916.67
c) $9,523.81
d) none of the above
e) cannot be determined
3. A T-bill has a face value of $10,000 and is selling for $9,800. If the T-bill matures in 90 days, what is its effective annual yield?
a) 16%
b) 04%
c) 42%
d) 12%
e) none of the above
4. A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The risk-free rate is 6%. An investor has the following utility function:
U = E(r) – (A/2) s2
Which value of A make this investor indifferent between the risky portfolio and the risk-free asset?
a) 5
b) 6
c) 7
d) 8
e) none of the above
5. The first major step in asset allocation is:
a) assessing risk tolerance
b) analyzing financial statements
c) estimating security betas
d) identifying market anomalies
e) none of the above
6. Passive investing…
a) may be accomplished by investing in index mutual funds
b) involves considerable security selection
c) involves considerable transaction costs
d) a and c
e) b and c
- Which of the following statement(s) are TRUE regarding the selection of a portfolio from those that lie on the Capital Allocation Line?
a) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors.
b) More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors.
c) Investors choose the portfolio that maximizes their expected utility.
d) a and c
e) b and c
8 . An investor who wishes to form a portfolio that lies to the right on the optimal risky portfolio on the Capital Allocation Line must?
a) lend some of her money at the risk-free rate and invest the remainder in the optimal risky portfolio
b) borrow some money at the risk-free rate and invest in the optimal risky portfolio
c) invest only in risky securities
d) such a portfolio cannot be formed
e) none of the above
9. Which statement is NOT true regarding the market portfolio?
a) It includes all assets of the universe.
b) It lies on the efficient frontier.
c) All securities in the market portfolio are held in proportion to their market values.
d) It is the tangency point between the capital market line and the indifference curve.
e) All of the above are true.
10. According to the Capital Asset Pricing Model (CAPM), a security with a…
a) positive alpha is considered overpriced
b) zero alpha is considered to be a good buy
c) negative alpha is considered to be a good buy
d) positive alpha is considered to be underpriced
e) none of the above
PROBLEMS
1-[10 marks] Consider two risky securities A and B with zero correlation. A has an expected return of 10% and risk level of 16%. B has an expected return of 8% and risk level of 12%. Assume a risk free rate of 5%. Assume CML is true.
Questions
- Compute the standard deviation of a zero risk portfolio, if any.
- Which of the following portfolio (s) is (are) most efficient?
- 45% in A and 55% in B.
- 65% in A and 35% in B.
- What is the asset allocation for an investor who is willing to accept a risk level of 15%?
2-[10 marks] You purchased a 6-year annual interest coupon bond one year ago. The coupon interest rate was 10% and the par value was $100. At the time you purchased the bond, the yield to maturity was 8%.
Question
If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, what is your annual total rate of return on holding the bond for that year?
3-[10 marks] Assume a 10% coupon bond with a Par equal to $100, the yield to maturity is 7% and the maturity is 3 years.
Question
What would be the modified duration and the convexity values that will be used to value the sensitivity the bond?
4-[10 marks] Your boss has just assigned you a job which requires the use of the duration matching scheme to immunize a single debt service of $5000 five years from now.
Today, there are two traded zero coupon government bonds:
Bond A 4-year yield to maturity = 10%
Bond B 6-year yield to maturity = 10%
Questions
- What will be the composition of your bond portfolio?
- How much initial investment is needed in order to cover the debt service?
(you believe in Macaulay Duration and assume a flat term structure)
- [15 marks] The Treasury-bill rate is 7%. You manage a risky portfolio with:
expected rate of return of 17%, standard deviation of 27%. Further suppose that your risky portfolio includes the following investments in the given proportions: Stock A (27%), Stock B (33%), and Stock C (40%).
Questions
- What are your client’s investment proportions in your three stocks and the T-bill fund so that the overall portfolio will have an expected rate of return of 15%?
- What is the expected rate of return on the overall portfolio if your client prefers to invest in your fund that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio’s standard deviation will not exceed 20%?
- [15 marks] Consider the following table, which gives a security analyst’s expected return on two stocks for two particular market returns:
Market Return Aggressive Stock Defensive Stock
.05 –.02 .06
.25 .38 .12
Questions
- What are the betas of the two stocks?
- What is the expected rate of return on each stock if the market return is equally likely to be 5% or 25 %?
- If the T-bill rate is 6 percent and the market return is equally likely to be 5 %t or 25 %, draw the SML for this economy.
- Plot the two securities on the SML graph. What are the alphas of each?
7.[20 marks] You currently have 2000 shares of Daimler-Benz common stock which currently priced at $75 a share. You agree to buy a house in Spain priced at $160,000 payable in 3 months from now. You are concerned that the stock price of Daimler-Benz could drop significantly so that the proceeds from the sale of the stock would be insufficient to cover the payment for the house. You are looking for the strategy to protect the $ 75 a share or to enhance the value of the portfolio to $160,000.
Four strategies were proposed:
- Purchase a 3-month at the money put contracts on Daimler-Benz stock, and finance the purchase by selling 3-month calls with an exercise price of $80.
- Write a 3-month call option on Daimler-Benz stock at a strike price of $80 with an option premium of $2.
- Purchase a 3-month at the money put option on Daimler-Benz with an option premium of $2.
- Sell the stock at $75 a share and invest the proceeds in a 10% 3-month T-bill.
Question
Rank all four strategies in terms of the objective stated above and indicate the best one. Support your conclusion by showing the payoff structure of each strategy under four possible states: minimum payoff, stock price = $75, stock price= $80 and maximum payoff
