February 14th 2022

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Exercise 1 Eros wants to invest into corporate bonds. On the market there are some alternatives: a) TVB345; risk free, zero coupon bond, maturity 5 months, price 99.751 b) KIS742; maturity 17 months, annual coupon 2%, rating BBB, clean price 99.998 c) MLF489; maturity 17 months, annual coupon 3% but paid every 6 months, rating BB, clean price 100.855 The spread requested by the market on BBB and BB bonds, compared to risk free securities, is equal to 1% and 1.4% respectively. Find: 1. The dirty price and the accrued interest for KIS742 and MLF489 bonds 2. Some points of the interest rate term structure of risk-free securities 3. The duration and YTM of the three bonds 4. The % change in the price of MLF489 if suddenly interest rates will increase by 1% on all maturities 5. The qualitative shape of a graph in which on the horizontal axis we have time and on the vertical axis the dirty price and clean price of bond MLF489, assuming that interest rates on the market will not change so much in the next months On the market there is a fourth bond (MLF490) which has all the same characteristics as MLF489 but it’s callable. Should the price of MLF490 on the market be larger or lower compared to MLF489? Exercise 2 Juliet wants to open a new laboratory to engineer innovative satellites. The initial investment required is equal to € 0.7 million. Expected operating cash flows, gross of income taxes, are as follows: time 1 = € 0.1 million, time 2 = € 0.25 million, time 3 = € 1 million, time 4 = € 0. 8 million. The value of the project after time 4 is negligible, since other investments are expected to be required thereafter. The annual unlevered cost of capital for equity investors is equal to 20%. The tax rate on operating cash flows is equal to 20%. Compute the net present value…