Financial Market Assignment

Financial Market Assignment

Question

1. Cisco (CSCO) issued 8 billion bonds last month (feb 2014)
a. What wasthe couponrate offered by CSCO
FV= $1000 TMB= 8B rate=?

b. What was YTM on CSCO bond?
Find ytm=I=k=discount rate

c. find out the price of CSCO bond (PV).
How much you would be paying if you are an investor.


2. Take the following data as giving:
Bond A: FV=$1000 I=5% C.R.=5% N=10
Bond B: FV=$1000 I=5% C.R.=5% N=10

Show all calculations to prove Malkiel Bond T5 which says, "God is on our side", called covexity, i.e. a 1% increase in i-rate and a 1% decrease in i-rare in both bonds will NOT have a symmetric % ? P bond



3. Several years ago, a Texas bank offered a thirty-year CD with an annual return indexed to inflation. The rate offered was the annual percentage increase in the CPI plus 4 percent. Suppose that you are in the 28 percent marginal tax bracket and require a 5 percent real return after . Suppose also that the annual inflation rate last year was 3 percent, so this year’s annual rate on the CD investment is set at 7 percent.

a. Show the after-tax real return you would earn, assuming that the inflation rate stays at 3 percent and the offered is 7 percent.

b. What ex-ante nominal rateshould you require instead to keep your after-tax real yield at 5 percent?