January23rd2019

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Exercise 1 On the financial market we find the following bonds: - XS47: risk-free bond, annual coupon 1.2% paid each 12 months, time to maturity 15 months, clean price 100.871 - XS33: risk-free bond, annual coupon 1.0% paid in two parts each 6 months, time to maturity 9 months, clean price 100.600 We know that the annual interest rate at the maturity of 3 months is 0%. Compute: 1. The accrued interest (accrual) and the dirty prices of the two bonds, 2. Other points of the interest rate term structure, 3. The duration of the two bonds and the estimated volatility. On the market we find also a risky bond: - M5SX: annual coupon 2.8% paid each 12 months, time to maturity 15 months, clean price 101.848. 4. Compute: The accrued interest and the dirty price, 5. The yield to maturity, 6. The average spread requested by the market, on the bond return. Captain Findus invests 10% of his savings in the first bond, 25% in the second bond and 65% in the third bond. Find out: 7. The yield to maturity of the portfolio, 8. The duration of the portfolio. Exercise 2 Analysts are studying the business plan of a company listed on the Stock Exchange. Expectations are as follows: Year 1 Year 2 Year 3 Year 4 and thereafter Return on equity (ROE) ROE1=8% ROE2=12% ROE3=14% ROELT=10% Payout ratio (PR) PR1=30% PR2=20% PR3=20% PRLT=50% The return on equity is the ratio between the net profit during the year and the book value of the equity capital at the beginning of the year. The company is not levered and for sake of simplicity there are no taxes on corporate income. The equity capital is made up by 60 million sh ares and the book value per shares is today 1.8 €. The return on equity of the last year has been 10%. The annual cost of equity capital kE is equal to 9%. Compute: 1. The expected…