June 13th 2022

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Exercise 1 (10,5 points) On the Milan exchange we find the following bonds, denominated in Euro: • IT48: rated A, coupon 1% paid annually, maturity 28 months • IT31: rated BBB, annual coupon 2% paid every 6 months (i.e. 1% every semester), maturity 14 months • IT90: rated BB, zero coupon bond, maturity 8 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 0.7% for maturities up to 1 2 months and 1% for maturities from 13 months to 30 months). Currently, this is the spread that the market in the Euro area is requesting for different rating notches, compared to risk-free securities: Rating AA A BBB BB B CCC Annual spread +0.3% +0.6% +1.8% +2.2% +2.9% +4.5% Compute: 1. The equilibrium dirty price and eventually the clean price for the bonds 2. The yield to maturity (YTM) 3. The duration and expected volatility Explain which could have been the effects of the issuance of the aforementioned bonds on the issuers’ asset value. On the market we find also another bond (IT55) which is denominated in US$ and is not risk -free. Maturity is 8 months, annual coupon 2%. The clean price is 100.235. Explain which of the following parameters can or cannot be computed starting from the information available (and why): dirty price, YTM, duration, rating and spread requested by the market. Exercise 2 (10 points) Plenilune will soon be listed on the stock exchange. Financial analysts think that the profitability of the company in the future will be described by the metrics below: Year 1 Year 2 Year 3 Year 4 and thereafter Return on equity (ROE) ROE1=10% ROE2=8% ROE3=12% ROELT=12% Payout ratio (PR) PR1=70% PR2=70% PR3=80% PRLT=90% The return on equity is the ratio between the net profit…