September 9 2021

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Exercise 1 On the market for corporate bonds we find the following securities: • IT98: rated A, zero coupon bond, maturity 10 months, price on the market today 100.083 • IT53: rated BBB, annual coupon 1.1%, maturity 14 months, clean price on the market today 100.348 • IT09: rated BB, annual coupon 2.5%, maturity 14 months, clean price on the market today 101.498 The principal is paid back at maturity in all cases. Currently, this is the spread that the market is requesting for different rating notches, compared to AAA risk free bonds: Rating AA A BBB BB B CCC Annual spread +0.1% +0.3% +0.8% +1.2% +2.0% +3.2% Find: 1. Some points of the interest rate term structure 2. The duration of the three bonds 3. The yield-to-maturity (YTM) of the three bonds 4. The estimated volatility of the three bonds 5. If it is possible to build an arbitrage portfolio in the situation that the clean price of the IT09 bond is equal to 101.500 (and eventually how) 6. Which bonds would you select today to build a portfolio with a duration equal to 1 year (and the relative weight in the portfolio of each bond, approximately) 7. The annual tax saving that the issuers of the three bonds can enjoy (assuming that the corporate tax rate is equal to 28% and the par value of each emission is equal to € 80 million) Exercise 2 SGNAM is a utility company with stable cash flows and the market consensus on the profitability of the company for the future is as follows: Year 1 Year 2 Year 3 Year 4 and thereafter Return on equity (ROE) ROE1=18% ROE2=20% ROE3=18% ROELT=16% Payout ratio (PR) PR1=70% PR2=80% PR3=80% PRLT=90% 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…