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- Part AUsing the following free cash flows and cost of equity = 7%, discount FCF year 1 back to time 0 (today). FCF year 1 = 500; FCF year 2 = 520; FCF year 3 = 560; FCF year 4 = 590; FCF year 5 = 610 a) 429.36 b) 467.29 c) 512.85 d) 422.10Part B Using the following expected interest payments, cost of debt = 5%, and tax-rate = 21%, discount the year 4 expected payment back to time 0 (today). Expected interest year 1 = 50; year 2 = 35; year 3 = 20; year 4 = 10; 5 = 0 a) 9.31 b) 10.11 c) 13.65 d) 6.50Question A, B and C is required. Question 3. Bond Consider a bank with the following balance sheet (M means million):AssetsValueDuration of the AssetConvexity of the Asset5yr bond bought at a yield of 3.4% (lending money)$550M4.562 12.026 12yr bond bought at a yield of 4% (lending money)$800M9.453 53.565 LiabilitiesValueDuration of the LiabilityConvexity of the Liability2yr bond sold at a yield of 2.4% (borrowing money)$300M1.9412.3844yr bond sold at a yield of 2.8% (borrowing money)$500M3.7598.206a) Calculate the equity (total asset – total liability) to asset ratio of the bank(Hint: equity to asset ratio = total equity/total asset) b) Calculate the duration and convexity of the both asset and liability sides; c) If the interest rates go up by 1%, using the duration and convexity rule to determine the net worth of the bank and the equity to asset ratio;Explain why y0u disagree 0r agree with the f0ll0wing statements. The answer sh0uld n0t be m0re than 3 sentences (with reference of google links) Step 1 Define Treasusy BondS & Corporate Bonds Step 2 Difference between annuity due and ordinary annuity Step 3 Treasury b0nds are riskier than c0rp0rate b0nds. All 0ther things held c0nstant; the future value 0f an 0rdinary annuity is always having a higher future value than annuity due. All 0ther things held c0nstant, the price 0r interest rate risk 0f sh0rt-term b0nd is always l0wer than l0ng-term b0nd
- For bond A with C = $40, n= 4, y= 0.04, P=$1,000 and M= $1,000, calculate Macaulay DurationWhat is assumed the be the face value aka par value aka principal aka loan amount of a bond? It's also assumed to be a bond's FV. 10% $0 $100 $1,000Determine the price of a $310,000 bond issue under each of the following independent assumptions: Note: Use tables, Excel, or a financial calculator. Round your intermediate calculations and final answer to the nearest whole dollar. (FV of $1. PV of $1. FVA of $1. PVA of $1. FVAD of $1 and PVAD of $1) 1. 2. 3. Face value 310,000 310,000 310,000 Maturity 10 years 10 years 20 years Interest Paid annually semiannually semiannually Stated Rate Effective Rate 11% 11% 11% 12% 10% 10% Price
- A$1000,5%bondwithannualcouponswillberedeemedattheendof9years.Findthepricetoyield6%. a. $1,074.35 b. $974.00 c. $1,004.95 d. $931.98Balance Sheet (dollars in thousands) and Duration (in years) Duration AmountT-bills. 0.5 $ 90T-notes 0.9 55T-bonds 4.393 176Loans 7 2,724Deposits. 1 2,092Fed. funds 0.01 238Equity 715What is the average duration of all the assets? What is the average duration of all the liabilities? What is the FI’s leverage-adjusted duration gap? What is the FI’s interest rate risk exposure? If the entire yield curve shifted upward 0.5 percent (i.e., ΔR/(1 + R) = 0.0050), what is the impact on the FI’s market value of equity? If the entire yield curve shifted downward 0.25 percent (i.e., ΔR/(1 + R) = −0.0025), what is the impact on the FI’s market value of equity?Interest Expense Discount on Bonds Payable v Cash v Feedback V Check My Work The straight-line method of amortization provides equal amounts of amortization over the life of the bond. 3. Determine the total interest expense for 20Y1. Round to the nearest dollar. $ 4. Will the bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest? Yes 5. Compute the price of $5,946,703 received for the bonds by using the present value tables in Appendix A. Round your PV values to 5 decimal places and the final answers to the nearest dollar. Your total may vary slightly from the price given due to rounding differences. Present value of the face amount $ Present value of the semiannual interest payments Price received for the bonds 2$ 00
- Exercises. 1. Three 2-year bonds have the following cash flows and prices: A. (2,3), PA = 2.5 B. (3, 4), PB = 3.6 C. (4,5), Pc 4.8 Is there any arbitrage opportunity? How can you change Pc so there is no arbitrage opportunity? 2. Three 4-year bonds have the following cash flows and prices: A. (2, 2, 2, 3), PA = 2.5 B. (3, 3, 3, 4), PB = 3.6 C. (4, 4, 4, 5), Pc = 4.8 Is there any arbitrage opportunity? How can you change Pc so there is no arbitrage opportunity?Assume bonds payable are amortized using the straight-line amortization method unless stated otherwise. Pricing bonds Bond prices depend on the market rate of interest, stated rate of interest and time. Requirements Compute the price of the following 8% bonds of Country Telecom. a. $100,000 issued at 75.25 $100,000 issued at 94.50 b. $100,000 issued at 103 50 c. $100,000 issued at 94.50 d. $100,000 issued at 103.25 2. Which bond will Country Telecom have to pay the most to retire at maturity? Explain your answer.financial risk management Assume you have the following asset and liability in your Balance Sheet:Asset - Bond AModified Duration = 2.6 yearsValue= RM1.5 millionLiability - Bond BModified Duration = 3.1 yearsValue= RM1.0 million a. Calculate the duration gap.