Investment Analysis
BADM 530 – FINAL EXAM
FALL I – 2013
1. A $1000 par bond, just issued has a coupon rate of 6% that is paid annually, a 25 year maturity, and a yield to maturity of 9%.
a. Find the holding period return for 1 year if the bond is selling at a yield to maturity of 8% by year end.
b. If you sell the bond at the end of 1 year with a YTM of 8%, what tax will you owe if the tax rate on interest income is 40% and the rate on capital gains is 20%?
c. What is the after-tax holding period return on the bond?
d. Find the realized compound yield before taxes for a two-year holding period, assuming that you sell the bond after 2 years, the bond yield is 8% at the end of the second year, and the coupon can be reinvested at 4% for 1 year.
2. Find the Duration of a 5 year, semi-annual, $1000 par bond, with a 8 ½ % coupon, and the current market rate is 10%.
3. A 20 year $1000 par bond is making annual coupon payments with a coupon rate of 10% and has a Duration of 12.6. The bond currently sells at a YTM of 7%. Find the price of the bond if the YTM falls to 6% or rises to 8%. What prices for the bond would be predicted by the Duration rule? What is the percent error between the price predicted by the calculator and the Duration rule in each case?
4. Using the following information, calculate the (1) present value of the bond, (2) the current yield, (3) the holding period return, and (4) the yield to first call: $1000 par bond, 24 year maturity, currently 2 years old, 7 3/32% semi-annual coupon, the bond will pay a 101 3/8% of par call premium if called with a 5 year Call protection, a 9 3/16% current market rate, and you will sell the bond 3 years prior to its maturity for $930.
5. ABC Corporation has a ROE of 8% and a Beta of 1.5. It plans to maintain a retention rate (plowback) of 60%. This year’s earnings were $4 per share. The annual dividend was just paid. The expected return on the market in the coming year is 13%. T-bills currently pay 6%.
a. What is the current price of the stock?
b. Calculate the P/E ratio.
c. Calculate the present value of growth opportunities.