Assignment: Financial Markets
Problem I
Suppose there are two bonds you are considering:
Bond A Bond B
Maturity (years) 15 25
Annual Coupon rate (%) 6 4
Par Value 1000 1000
1) If both bonds had a required rate of return of 5%, what would the bonds' prices be?
2) Re-calculate the prices of the bonds if the required return falls to 7%. Could you explain why the price increases or decreases given this change in required return?
Problem II
Calculate the NAV (Net asset value) of the following fund, assuming 500 shares are outstanding. Calculate the percentage change in the NAV of the fund if stock C climbs to $50.7.
Stock Shares Owned Price
A 1,500 $6.75
B 4,000 $45.30
C 2,000 $32.04
Cash n.a. $3,508
1) Will the NAV increase or decrease? Why?
2) Calculated your return on your investment given the change in NAV
Problem III
Suppose the Swiss Franc is currently traded at CHF 0.89/$. The British Pound is traded at GBP 0.79/$. Ignoring transaction costs:
1) Determine the CHF/GBP exchange rate consistent with these direct quotations.
2) Suppose the CHF/GBP cross rate in the market was at CHF 1.05/GBP. Is there any arbitrage opportunity?
Problem IV
Consider the following three stocks:
o Stock A is expected to provide a dividend of $50 a share forever
o Stock B is expected to pay a dividend of $8 next year. Thereafter, dividend growth is expected to be 2% a year forever.
o Stock C is expected to pay a dividend of $15 next year. Thereafter, dividend growth is expected to be 12% a year for 4 years (until year
5) and zero thereafter.
1) If the market capitalization rate for each stock is 8%, which stock is the most valuable?
2) What happens if the capitalization rate drops to 6%? Explain
3) Assume EPS for stock A is 4, Stock B 9, and Stock C 15. Calculate the P/E ratio for each. Briefly explain what the different values mean to you.
Problem V
Word limit: 500 words.
Imagine that you have 100 000 EUR for medium-term investments. Which asset classes you would choose? (Specify share of each asset class).
1) How would you manage the risk of your investment protfolio? (Be concrete)
2) Would you pick some individual securities or would you invest in broad market portfolios? Why? If you decided to invest in some individual securities, explain how would you choose securities to your portfolio?
Format your assignment according to the following formatting requirements:
(1) The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
(2) The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
(3) Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.