July 5 2021

Pagina 1

Exercise 1 Mr. Goglio , a rising top banker, is selecting bonds traded on the exchange for its clients. The following bonds are considered: • UK234: rated A, coupon 1% paid annually, maturity 30 months • AZ382: rated BBB, annual coupon 2% compounded every 6 months (i.e. 1% every semester), maturity 15 months • EY298: rated BB, zero coupon bond, maturity 12 months The principal is paid back at maturity in all cases. The interest rate term structure is rather flat (the annual risk -free interest rate is equal to -0.1% for maturities up to 20 months and +0.1% for maturities from 21 months to 30 months). Currently, this is the spread that the market is requesting for different rating notches: Rating AA A BBB BB B CCC Annual spread +0.3% +0.6% +1.1% +1.8% +2.5% +4% Compute: 1. The equilibrium dirty price and eventually the clean price for the bonds 2. The yield to maturity (YTM) 3. The duration and volatility Explain if, in the cases that the three bonds were putable, we expect larger or lower prices, YTM, duration and volatility, other parameters unchanged. Exercise 2 Gallo’s is a company financed with equity capital and debt. The number of equity shares outstanding is equal to 9 million and the value of the shares on the market is € 6 each. The value of the debt outstanding is equal to € 16 million (annual interest rate 5%). On average, each year the operating margin of the company is equal to € 7 million. Assuming that there is no taxation on corporate income and that the net profit is distributed as a dividend each year, compute: 1. The market value of the assets and of the equity capital and the earning per share EPS 2. The expected profitability of the assets (kA) and of the equity capital (kE) 3. Show that Proposition II by M&M predicts the value of kE Pollo’s is a…