September92017

Page 1

Exercise 1 The following bonds are traded on the market: - Bond Blue; it is considered risk-free; maturity 15 months, annual coupon 0.5%, clean price 100.751 - Bond Emerald; it is considered risk-free as well; m aturity 3 months; zero coupon, price 100.125 - Bond Yellow: it is considered risky; maturity 15 m onths, annual coupon 2%, clean price 101.110 - Bond Red: it is considered very risky; maturity 15 months, annual coupon 5%, clean price 103.155 Compute: 1. The accrual and dirty price, where possible 2. Some points of the interest rate term structure 3. The yield to maturity (YTM) and the duration of all the bonds 4. The spread requested by the market on the yield, for the two risky bonds Exercise 2 Alberto is planning to open a workshop in Sicily to p roduce pistachio cream. The initial investments req uired to build the manufacturing plant is equal to € 450,000. The foll owing cash flows, gross of taxes, are expected in t he future: first year € 80,000; second year € 120,000; third year € 480,000; fourth year € 280,000. The tax rate to be applied to cash flows is equal to 26%. The cost of capital (unlevered) is equal to 12%. Alberto is considering four different opportunities to finance the project: 1. Equity capital only 2. Equity and debt (loan € 200,000 to be paid back i n 4 years, i.e. € 50,000 must be paid back each yea r; annual interest rate 5%) 3. Equity and debt (loan with leverage L=debt to value of the project equal to 60% each year; annual interest rate 6%) 4. Equity and grant from the European Union; € 100,00 0 are granted as a contribution (not to be paid bac k) and € 100,000 are granted as a subsidized loan (must be paid back at time 4 but no interests are paid) Compute the net present value of the project under the four alternatives. Compute the…