A. ESSAYS
1.Expound on credit analysis. Use the concept of zeta score and the details it includes.
2. a) Why is duration applicable to bonds which are not callable? Explain in your own words the reason that it does not apply to callable bonds and common stocks as well as real estate.
b) Describe the way duration is used and how it is adjusted with convexity.
3. a) Define classical immunization. How do we use it in bond portfolio management (BPM)?
b) Discuss the use of horizon matching in BPM.
4. Talk on the survey we presented. How many portfolio managers believe in the EMH? Among those who espouse FA, how many pursue stock picking, market timing and industry analysis? What are the key choices of those respondents? Explain their evaluation of their performance in terms of the consistency of their answers.
5. Analyze the 10 determinants of bond prices.
B. PROBLEMS
1. There is a firm which does not pay any distribution of profit for 6 years. In year 6 it pays $3 out of $5. The dividend remains constant for 4 years. Afterward, it grows perpetually. The ROE is .05. The beta levered is 1.5, while the default free rate is 5% and the market premium is 6%. Derive the price.
2. a) what are the yield to maturity and the yield to call of a 20 year, 8% bond that is selling for $1150 has a call value of $1100 in year 6? Which will the investor make?
b) We buy a 15 year, 10% bond yielding 9%. We sell it after 4 years when market rates are 12%. What is the realized compound yield during the 4 years,if YTM decreases, as soon as we buy it, and it remains at 6% for the 4 year duration.
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