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# I-Asgns4

By Patricia Clark,2014-07-18 20:18
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I-Asgns4

LESSON 4

Suggested solutions

Question 1 (35 marks)

Computer solution

a. (15 marks)

Refer to formula printout, cell range A6 to B20.

b. (3 marks)

The effective yield is 8%.

c. (7 marks)

Refer to formula printout, cell range A22 to B32.

d. (5 marks)

The effective semi-annual rate is 3.92%. The market value of the bond will change to ?1,220.51.

e. (5 marks)

Case (i): The effective yield changes to 7.31% (or exactly 7.3108%). The effective semi-annual rate is 3.59%, and the market value of the bond with semi-annual interest payment changes to ?1,261.53 (or ?1,261.49, if 7.3108% is used).

Case (ii): The effective yield changes to 7.12% (or exactly 7.1197%). The effective semi-annual rate is 3.50%, and the market value of the bond with semi-annual interest payment changes to ?1,218.56 (or ?1,218.58, if 7.1197% is used).

Note:

For part (a), 3 marks for each correct formula in cells B18, B19, and B20. For part (c), 3 marks for each correct formula in cells B31 and B32. Formulas may vary; award full marks for any reasonable formulas.

Corporate Finance Fundamentals Suggested solutions 4 1

Computer printout

ABFN1: LESSON 4: QUESTION 1: SOLUTION1

3

4

ENTER THE FOLLOWING INFORMATION:5

6

Face value of bond? 1,000.007

Coupon rate11.00%8

Coupons/year19

Number of years to maturity710

Coupons to maturity711

Coupon rate/period11.00%12

Coupon amount? 110.0013

Market value of bond? 1,208.251415

PART a.16

Estimated effective yield8.00%17

Present value of face value of bond? 583.4918

Present value of coupons? 572.7019

Calculated market value of bond? 1,156.192021

PART b.22

Face value of bond? 1,000.0023

Coupon rate11.00%24

Coupons/year225

Number of years to maturity726

Coupons to maturity1427

Coupon rate/period5.50%28

Coupon amount? 55.002930

Effective semi-annual rate3.92%31

Market value of bond (semi-annual interest)? 1,167.4232

Corporate Finance Fundamentals Suggested solutions 4 2

Computer printout

ABFN1: LESSON 4: QUESTION 1: Part E(i) SOLUTION1CGA-CANADA234ENTER THE FOLLOWING INFORMATION:56 Face value of bond? 1,000.007 Coupon rate12.00%8 Coupons/year19 Number of years to maturity710 Coupons to maturity711 Coupon rate/period12.00%12 Coupon amount? 120.0013 Market value of bond? 1,250.001415PART a.16 Estimated effective yield7.31%17 Present value of face value of bond? 610.2318 Present value of coupons? 639.7719 Calculated market value of bond? 1,250.002021PART b.22 Face value of bond? 1,000.0023 Coupon rate12.00%24 Coupons/year225 Number of years to maturity726 Coupons to maturity1427 Coupon rate/period6.00%28 Coupon amount? 60.002930 Effective semi-annual rate3.59%31 Market value of bond (semi-annual interest)? 1,261.4932

ABFN1: LESSON 4: QUESTION 1: Part E(ii) SOLUTION1CGA-CANADA234ENTER THE FOLLOWING INFORMATION:56 Face value of bond? 1,000.007 Coupon rate11.00%8 Coupons/year19 Number of years to maturity710 Coupons to maturity711 Coupon rate/period11.00%12 Coupon amount? 110.0013 Market value of bond? 1,208.251415PART a.16 Estimated effective yield7.12%17 Present value of face value of bond? 617.8918 Present value of coupons? 590.3619 Calculated market value of bond? 1,208.252021PART b.22 Face value of bond? 1,000.0023 Coupon rate11.00%24 Coupons/year225 Number of years to maturity726 Coupons to maturity1427 Coupon rate/period5.50%28 Coupon amount? 55.002930 Effective semi-annual rate3.50%31 Market value of bond (semi-annual interest)? 1,218.5832

Corporate Finance Fundamentals Suggested solutions 4 3

Formula printout

ABPART a and b.16

Estimated effective yield0.0817

Present value of face value of bond=B7/(1+B17)^B1118

Present value of coupons=PV(B17,B11,-B13)19

Calculated market value of bond=SUM(B18:B19)20

21

PART c,d and e.22

Face value of bond=B723

Coupon rate=B824

Coupons/year225

Number of years to maturity=B1026

Coupons to maturity=B25*B2627

Coupon rate/period=B24/B2528

Coupon amount=B23*B24/B2529

30

Effective semi-annual rate=(1+B17)^(1/B25)-131

Market value of bond (semi-annual interest)=PV(B31,B27,-B29)+B23/(1+B31)^B2732

Question 2 (35 marks)

Computer solution

Note:

For parts (a) and (b), award 1 mark for each correct formula. For part (c), allow 2 marks for each correct

formula. Formulas may vary; allow full mark for any reasonable formula.

a. (3 marks)

Refer to the formula printout for cells C19, C20, C21.

b. (3 marks)

Refer to the formula printout for cells E19, E20, E21.

c. (15 marks)

Refer to the formula printout for cells C26, C27, C28, C29, C30.

d. (7 marks)

C26: 6.5000%

C27: 4.5621%

C28: 5.0519%

C29: 5.0521%

C30: 4.5619%

Corporate Finance Fundamentals Suggested solutions 4 4

The best one-year investment is the one providing the highest return. From the values provided above, it is clear that investing in Canada (6.5000%) is superior to the other four alternatives.

Note:

11Award 3/2 marks for the values and 3/2 marks for the conclusion.

e. (7 marks)

C26: 6.5000%

C27: 5.9489%

C28: 6.8703%

C29: 6.8706%

C30: 5.9487%

In this scenario, the best one-year investment is direct investment in Great Britain through US dollars (6.8706%). The return on this investment is superior than the other four alternatives.

Note:

11Award 3/2 marks for the values and 3/2 marks for the conclusion.

Corporate Finance Fundamentals Suggested solutions 4 5

Computer printout

ABCDE

1FN1: LESSON 4: QUESTION 2: PART C: SOLUTIONS2CGA-CANADA

3

4

6Interest rate in United States5.7000%7Interest rate in Great Britain6.0000%8

9

10EXCHANGE RATES11Foreign currencySpotForward

12United Statess( C|US)1.13790f( C|US)1.1256513Great Britains( C|GB)2.10298f( C|GB)2.0841714US\$|English pounds(US|GB)1.84812f(US|GB)1.8515215

16

17RECIPROCAL RATES:EXCHANGE RATES

18CountrySpotForward

19United Statess(US|C )0.87881f(US|C )0.8883820Great Britains(GB|C )0.47552f(GB|C )0.4798121English pound|US\$s(GB|US)0.54109f(GB|US)0.5401022

23

24INVESTMENT RETURN ANALYSIS:

25Investment inYield

27United States4.5621%

28Great Britain5.0519%

29Great Britain via U.S. \$5.0521%

30United States via English pound4.5619%31

32

33ALTERNATIVE SOLUTION:

34Students may choose to convert the foreign investment via the

35intermediate foreign currency to convert back to Canadian \$:

36This method is also correct, but affects the cell formula of C29 and C30:

37 Great Britain via U.S. \$5.0518%

38 United States via English pound4.5622%

Corporate Finance Fundamentals Suggested solutions 4 6

Computer printout

ABCDE

1FN1: LESSON 4: QUESTION 2: PART E: SOLUTION2CGA-CANADA

3

4

6Interest rate in United States5.7000%7Interest rate in Great Britain6.0000%8

9

10EXCHANGE RATES11Foreign currencySpotForward

12United Statess( C|US)1.13790f( C|US)1.1405813Great Britains( C|GB)2.10298f( C|GB)2.1202514US\$|English pounds(US|GB)1.84812f(US|GB)1.8589215

16

17RECIPROCAL RATES:EXCHANGE RATES

18CountrySpotForward

19United Statess(US|C )0.87881f(US|C )0.8767520Great Britains(GB|C )0.47552f(GB|C )0.4716421English pound|US\$s(GB|US)0.54109f(GB|US)0.5379522

23

24INVESTMENT RETURN ANALYSIS:

25Investment inYield

27United States5.9489%

28Great Britain6.8703%

29Great Britain via U.S. \$6.8706%

30United States via English pound5.9487%31

32

33ALTERNATIVE SOLUTION:

34Students may choose to convert the foreign investment via the

35intermediate foreign currency to convert back to Canadian \$:

36This method is also correct, but affects the cell formula of C29 and C30:

37 Great Britain via U.S. \$6.8706%

38 United States via English pound5.9487%

Corporate Finance Fundamentals Suggested solutions 4 7

Formula printout

CDE

121.1379f( C|US)1.12565

132.10298f( C|GB)2.08417

141.84812f(US|GB)1.85152

15

16

17

18Forward

19=1/C12f(US|C )=1/E12

20=1/C13f(GB|C )=1/E13

21=1/C14f(GB|US)=1/E14

22

23

24

25Yield

26=E5

27=C19*(1+E6)*E12-1

28=C20*(1+E7)*E13-1

29=(C19*C21*(1+E7)*E13)-1

30=(C20*C14*(1+E6)*E12)-1

Question 3 (10 marks)

Multiple choice (1 mark each) a. 4) Lesson Notes, Topic 4.1

2(1 + i) (1.07) = (1.09) i = 0.11037

b. 4) Lesson Notes, Topic 4.1

IP = = 80 ? 0.04 + 2,000 r

c. 3) Lesson Notes, Topic 4.1

r1010P = (701.1025);1,000(1.05)1,154.43 (E1

d. 2) Lesson Notes, Topic 4.5

e. 3) Lesson Notes, Topic 4.5

f. 1) Lesson Notes, Topic 4.5

g. 2) Lesson Notes, Topic 4.1

11181(1.11) 1,231.05 = 140 + 1,000 180.11(1.11)

Corporate Finance Fundamentals Suggested solutions 4 8

h. 3) Lesson Notes, Topic 4.1

i. 4) Lesson Notes, Topic 4.1

11101(1.08)1,268.40 = 120 + 1,000 100.08(1.08)

j. 2) Lesson Notes, Topic 4.5

Question 4 (10 marks)

a. (2 marks)

Prices: T-bill price = 100 ? (1.06) = ?94.34

bond price = 9(a 10 yrs, 9%) + 100(P 10 yrs, 9%)

= 9(6.418) + 100(0.422)

= ?100

b. (2 marks)

As discussed in Lesson Notes Topic 4.1 (Step 2), investors may expect higher interest

rates in the future than are seen now. This causes the yield curve to be upward sloping.

c. (3 marks)

New yields are 6 + 3 = 9% for the T-bill and 9 + 3 = 12% for the bond. This is the Fisher

equation approximation of (1.06)(1.03) 1 = 9.18% and (1.09)(1.03) 1 = 12.27%.

Either yields are acceptable. Using the simpler yields, the new prices are:

T-bill price = 100/(1.09) = ?91.74

bond price = 9(a 10 yrs, 12%) + 100(P 10 yrs, 12%)

= 9(5.650) + 100(0.322)

= ?83.05

d. (3 marks)

The risky bond yield is 12 + 4 = 16%. The bond price is:

bond price = 9(a 10 yrs, 16%) + 100(P 10 yrs, 16%)

= 9(4.833) + 100(0.227)

= ?66.20

Question 5 (10 marks)

a. (2 marks)

Violates the weak form.

b. (2 marks)

Violates the semi-strong form.

Corporate Finance Fundamentals Suggested solutions 4 9

c. (2 marks)

Supports the semi-strong firm.

d. (2 marks)

Violates the weak form.

e. (2 marks)

Violates the strong form.

100

Corporate Finance Fundamentals Suggested solutions 4 10

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