July22nd2019

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Exercise 1 Insana Inc. is willing to collect debt capital in order to open a commercial branch in Sicily. To this extent, 200 bonds will be placed on the market. The nominal value (par value) of each bond is equal to € 100,000, and is paid back at the expiration. The emission price is 100. The bonds pay an annual coupon equal to 6%. The expiration is equal to 5 years. Some months later, i.e. 4 months after the issue, the bonds are traded on the market. Their clean price is equal to 100.56. Determine: 1. The accrued interest and the dirty price, in that moment 2. The average spread of the yield compared to risk-free bonds: the latter in that moment offer an annual return equal to 1% (for maturities up to 3 years), 2% (for maturities larger than 3 years) 3. Duration and yield-to-maturity 4. The amount of the capital collected 4 months before, at the issue on the primary market 5. The maximum value of the interest rate on debt that an investor should be available to pay in order to build an arbitrage portfolio, borrowing money and buying the bonds 6. The value of the tax saving generated by the debt issue, that Insana Inc. might enjoy each year (assuming that the tax rate on corporate income is equal to 25%) Draw a graph describing (approximately) the value of the duration of the bond, as time goes by, up to maturity. Exercise 2 The current market value of company Patruk’s assets is equal to € 2 million. The two shareholders, Andrew and Albert, are examining an interesting investment. They estimate that, investing € 100,000 today, the project could lead to an increase in the cash flows (defined as revenues net of operating cash costs) equal to € 25,000 for the first 4 years of activity, and € 40,000 for further 4 years. If the project was financed with no debt, the annual…