FIN 4453 – PROJECT #3

FIN 4453 – PROJECT #3 (12 Questions)

 

  1. The Excel file Project 3 Question 1 Data contains information about a bond.
    1. Construct a Two-Way Data Table to demonstrate the impact of the coupon rate and the time to maturity on the bond’s duration using:
      1. Coupon Rates of 0%, 3%, 6%, 9%, 12%, 15% and
      2. Maturities of 3 years, 6 years, 9 years, 12 years, and 15 years.
    2. How is the bond’s duration impacted by varying the coupon rate?
    3. How is the bond’s duration impacted by varying the time to maturity?
    4. What implications would these impacts have on a bond investor?

 

  1. The Excel file Project 3 Question 2 Data contains information about three bonds.
    1. If you have a future liability of $1999 due in 12 years, what amount would you need to invest in order to meet this future liability if the future yield to maturity is assumed to be 8% per year?
    2. Using Matrix Algebra find a combination of Bonds 1 and 3 with a duration of 12.
    3. Using Matrix Algebra find a combination of Bonds 1 and 2 with a duration of 9.
    4. Using Matrix Algebra find a combination of Bonds 1, 2 and 3 with a duration of 12, subject to the condition that the weight (proportion) for Bond 3 is 50% larger than the weight (Proportion) for Bond 2.

 

 

  1. A stock is selling today for $80. The stock has an annual volatility of 40 percent and the annual risk-free rate is 12 percent.
    1. Calculate the fair price for a 1 year European call option with an exercise price of $95.
    2. Calculate how much the current stock price would need to change for the purchaser of the call option to break even in one year.
    3. Calculate the fair price for a 1 year European put option with an exercise price of $95.
    4. Calculate how much the current stock price would need to change for the purchaser of the put option to break even in one year.
    5. Calculate the level of volatility that would make the $95 call option sell for $15. (Use Goal Seek or Solver).
    6. Calculate the level of volatility that would make the $95 put option sell for $25. (Use Goal Seek or Solver).

 

 

 

  1. On April 15, 2015 you purchased an option which will allow you to buy a commercial building on January 10, 2019 for $12 million. Your current estimate of the value of the commercial building is $9 million.  The annual volatility for the change in the commercial building’s value is 25% and the risk-free rate is 14%.
    1. Calculate the value of the option to buy the commercial building.

 

  1. The Excel file Project 3 Question 5 Data contains return data re investing in Security A and Security B.
    1. Calculate the expected return for each security.
    2. Calculate the risk for each security.
    3. Which security has higher risk?

 

  1. Demand for Coca Cola at a local restaurant is 60 bottles per day with a standard deviation of 4 bottles per day.
    1. Compute the probability that demand will exceed 2450 bottles during the next 40 days.
    2. Compute the number of bottles the restaurant should stock to have at most a 10% chance of running out over the next 50 days.

 

  1. Suppose you can set the mean number of ounces of soda to be put into a can. The actual number of ounces has a standard deviation of 0.06 ounces.  This process follows a normal distribution.
    1. What should you set the mean to if you want at most 8% of your cans to contain more than 15 ounces? (Use Goal Seek or Solver).

 

  1. The Excel file Question 8 Data Project 3 contains information about three bonds. Use this data to:
    1. Compute the amount to be invested to meet the future liability noted in the data. This future liability is due in 8 years.
    2. Find a combination of Bond 1 and Bond 2 having a target duration of 8.
    3. Find a combination of Bond 1 and Bond 3 having a target duration of 8.
    4. Perform an analysis using a data table and an accompanying graph to determine which portfolio would be preferred to attempt to immunize this obligation.
      1. Construct a data table by varying the yield to maturity that shows the value of each portfolio at the end of 8 years.
      2. Based on your data table, construct a graph that demonstrates the performance of these two portfolios.
    5. Explain which portfolio you prefer to use to attempt to immunize this obligation which is due in 8 years.
    6. Comment on each portfolio’s performance.

 

  1. Redo the entire analysis of the model (including the data table and graph) in Question 8 above if the:
    1. The future liability due in 8 years is changed to $3,000.

 

  1. Redo the entire analysis of the model (including the data table and graph) in Question 8 above if the:
    1. The target duration for each portfolio is changed to 9.

 

  1. A stock sells today for $45. The price of the stock in a year is expected to be $50.  The annual volatility of the stock is 25%.
    1. Calculate the probability that in four years the stock will sell for more than $60.
    2. Calculate the probability that in four years the stock will sell for less than $35.
    3. Calculate the probability that in four years the stock will sell for a price between $27 and $54.
    4. You are 90% confident the stock price in four years will be between what two values?
  2. Explain the principle of immunization when used with a bond portfolio.
    1. What is bond portfolio immunization attempting to achieve?
    2. How is bond portfolio immunization achieved?
    3. Which bond components interact to make immunization successful?
      1. Explain how these bond components interact.

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