金融市场与金融机构基础(第9章)-英文版答案

ANSWERS TO QUESTIONS FOR CHAPTER 9(Questions are in bold print followed by answers.)1. Your broker is recommending that you purchase U.S. government bonds. Here is the explanation: Listen, in these times of uncertainty, with many companies going bankrupt, it makes sense to play it safe and purchase long-term government bonds. They are issued by the U.S. government, so they are risk free. How would you respond to the broker?U.S. Government bonds may be free of default risk, but they are not free from interest rate risk, which may cause the bond price to decline, resulting in a capital loss should the holder of bond sell it before maturity. Even then there is the inflation premium risk, which means that the principal may have less purchasing power at maturity than it does today.2. You just inherited 30,000 shares of a company you have never heard of, ABD Corporation. You call your broker to find out if you have finally struck it rich. After several minutes, she comes back on the telephone and says: “I dont have a clue about these shares. Its too bad they are not traded in a financial market. That would make life a lot easier for you. ”What does she mean by this?If the shares are traded on the market, and if the market is efficient, the current price would denote the value of the stock. Without market price information, share value would have to be approximated through other time-consuming and less reliable methods.3. Suppose you own a bond that pays $75 yearly in coupon interest and that is likely to be called in two years (because the firm has already announced that it will redeem the issue early). The call price will be $1,050.What is the price of your bond now, in the market, if the appropriate discount rate for this asset is 9%?PO = $75 (PVIFA) 2.09 + $1050 (PVIF) 2.09=$75 X 1.7591 + $1050 X .8417 = $1015.724. Your broker has advised you to buy shares of Hungry Boy Fast Foods, which has paid a dividend of $1.00 per year for 10 years and will (according to the broker) continue to do so for many years. The broker believes that the stock, which now has a price of $12, will be worth $25 per share in five years. You have good reason to think that the discount rate for this firms stock is 22% per year, because that rate compensates the buyer for all pertinent risks. Is the stocks present price a good approximation of its true financial value?PO= $1 (PVIFA) 5.22 + $25 X (PVIF) 5.22 = .3715 = $12.15The price is right, in fact the stock is slightly undervalued.5. You have been considering a zero-coupon bond, which pays no interest but will pay a principal of $1,000 at the end of five years. The price of the bond is now $712.99, and its required rate of return is 7.0%. This mornings news contained a surprising development. The government announced that the rate of inflation appears to be 5.5% instead of the 4% that most people had been expecting. (Suppose most people had thought the real rate of interest was 3%.) What would be the price of the bond, once the market began to absorb this new information about inflation?The nominal required rate of return is (real rate plus inflation) ir + if or currently 3% plus 4% = 7%. If if becomes 5.5% then the new required rate of return becomes 8.5%. The price of the bond would then be $1000/(1.085)5 or $665.05.6. State the difference in basis points between each of the following:a. 5.5% and 6.5%b. 7% and 9%c. 6.4% and 7.8%d. 9.1% and 11.9%a. 100 basis pointsb. 200 basis pointsc. 140 basis pointsd. 280 basis points7.a. Does a rise of 100 basis points in the discount rate change the price of a 20-year bond as much as it changes the price of a four-year bond, assuming that both bonds have the same coupon rate and offer the same yield?b. Does a rise of 100 basis points in the discount rate change the price of a 4% coupon bond as much as it changes the price of a 10% coupon bond, assuming that both bonds have the same maturity and offer the same yield? c. Does a rise of 100 basis points in the discount rate change the price of a 10-year bond to the same extent if the discount rate is 4% as it does if the discount rate is 12%?a. The price of the 20-year bond will fall more than that of the 4-year bond because there are more years for the new discount to apply to the cash flows of the 20-year bond.b. The price of the low coupon bond will change more due to the low amount of cash flows that can be reinvested at the higher rate.c. A change from the 4% base will lead to a larger change in price.8.During the early 1980s, interest rates for many long-term bonds were above 14%. In the early 1990s, rates on similar bonds were far lower. What do you think this dramatic decline in market interest rates means for the price volatility of bonds in response to a change in interest rates? Since the direction of the interest rate change is downward, price volatility should increase.9.a. What is the cash flow of a 6% coupon bond that pays interest annually, matures in seven years, and has a principal of $1,000?b. Assuming a discount rate of 8%, what is the price of this bond?c. Assuming a discount rate of 8.5%, what is the price of this bond?d. Assuming a discount rate of 7.5%, what is the price of this bond?e. What is the duration of this bond, assuming that the price is the one you calculated in part (b)?f. If the yield changes by 100 basis points, from 8% to 7%, by how much would you approximate the percentage price change to be using your estimate of duration in part (e)?g. What is the actual percentage price change if the yield changes by 100 basis points?a. $60 a year interest for 7 years plus $1000 principal in year 7 for a total of $1420 in cash flow.b. 5.2064 X $60 + .583 X $1000 = $895.38c. 5.119 X $60 + .565 X $1000 = $872.14d. 5.297 X $60 + .603 X $1000 = $920.82e. D = $920-.82-$872.14=$48.68/8.95=5.44$895.38 (0.85-.075)f. Applying the formula-D (change in yield) = -5.44 (.01) or a price increase of 5.42%.g. Price at 8% =$895.88, at 7% = $946.06, so actual percentage change is ($946.06 - $895.88)/$895.88=5.6%.10. Why is it important to be able to estimate the duration of a bond or bond portfolio?To answer this question, we must understand that duration is related to percentage price change. A simple formula can be used to calculate the approximate duration of a bond or bond portfolio. All we are interested in is the percent price change of a bond when interest rates change by a small amount. To control interest rate risk, it is thus necessary to be able to measure it. Duration provides that measure.11. Explain why you agree or disagree with the following statement: “Determining the duration of a financial asset is a simple process.”Disagree. Determining the durat