Question 15: You're half-way through preparing the following table of CAPM betas and expected returns: Asset Government bonds ASX200 ETF Westpac Ltd (WBC) CSL Ltd Beta ? ? 0.82 0.21 Expected return pa 0.04 0.1 ? ? Which of the below statements is NOT correct? (a) Government bonds have a zero beta. (b) The ASX200 market portfolio has a beta of one. (c) Westpac's expected return is 8.92% pa (d) CSL's expected return is 5.26% pa. (e) If the ASX200 were to fall by 10% today, government bonds would be expected to fall 4%.

Question 15: You're half-way through preparing the following table of CAPM betas and expected returns: Asset Government bonds ASX200 ETF Westpac Ltd (WBC) CSL Ltd Beta ? ? 0.82 0.21 Expected return pa 0.04 0.1 ? ? Which of the below statements is NOT correct? (a) Government bonds have a zero beta. (b) The ASX200 market portfolio has a beta of one. (c) Westpac's expected return is 8.92% pa (d) CSL's expected return is 5.26% pa. (e) If the ASX200 were to fall by 10% today, government bonds would be expected to fall 4%.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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3 Suppose that without an adjustment for the relationship between the yield on a bond to be hedged and the yield on the hedging instrument the hedge ratio is 1.30. Answer the below questions. (a) Suppose that a yield beta of 0.8 is computed. What would the revised hedge ratio be? (b) Suppose that the standard deviation for the bond to be hedged and the hedging instrument are 0.09 and 0.10, respectively. What is the pure volatility adjustment, and what would be the revised hedge ratio?
Q1-6. Which of the following statements are TRUE about zero-coupon bonds? I. If the market interest rate is the same as YTM, a zero-coupon bond will be traded at Par. II. Given the same principal, one with longer maturity should have higher interest rate risk. III. Given the same maturity, one with lower principal will have higher reinvestment risk. IV. Given the same market price, smaller capital is needed to (delta) hedge a bond portfolio with a zero coupon bond than with a coupon bond.
You are given the following prices and cash flows associated with bonds. CF stands for cash flow. Bond Price Today CF Year 1 CF Year 2 CF Year 3 A 105.185 10 10 110 B 90.371 100 0 0 C 91.784 5 105 0 D X 15 15 115 What is the current price of Bond D as per the no-arbitrage principle? In other words, what is the value of X?
b. Now suppose ExxonMobil’s bonds, rated AAA, have the same maturitiesas the Treasury bonds. As an approximation, plot an ExxonMobil yieldcurve on the same graph with the Treasury bond yield curve. (Hint: Thinkabout the default risk premium on ExxonMobil’s long-term versus shortterm bonds.)
round the following information: Government bonds: \table [[Maturity, Yield], [1,1% round the following information: Government bonds: Maturity Yield 1 1% 2 2.2% 3 3% 4 5% BB Bonds: Maturity Yield 1 6% 2 8% 3 11% 4 17% Draw the credit spread curve. If you know that the market is assuming a constant recovery rate for all maturities, What must be their assumption for the probability of default?
Question 3. A fixed rate bond with notional 1 pays annual coupons of c at times T1, T2, . . . , Tn where Ti+1 = Ti + 1 and notional 1 at time Tn. a) Write down the bond price BFXD c (t) at time t ≤ T0 in terms of ZCBs. b) Suppose t = T0 = 0. The yield of the bond is defined as the value Y such that B FXD c (0) = Xn i=1 c (1 + Y ) i + 1 (1 + Y ) n , that is, the rate at which IRR discounting gives the bond price. By summing a geometric series, show that BFXD c (0) = 1 if and only if Y = c. c) By writing a swap as the difference between a fixed rate bond and a floating rate bond, show that BFXD c (0) = 1 if and only if c = y0[0, Tn]. Remark 1. This exercise shows that the T-year spot swap rate is the bond coupon such that a T-maturity bond has price par, that is 100% of notional.
Which of the following statements regarding bonds and their terms is FALSE? *** OA. When we calculate a bond's yield to maturity by solving the formula, Coupon Coupon Coupon + Face Price of an n-period bond = (1 + )" + + + MA (1+)¹ (1+)² the yield we compute will be a rate per coupon interval. OB. The internal rate of return (IRR) of an investment in a zero-coupon bond is the rate of return that investors will earn on their money if they buy a default - free bond at its current price and hold it to maturity. OC. The yield to maturity of a bond is the discount rate that sets the future value (FV) of the promised bond payments equal to the current market price of the bond. OD. Financial professionals also use the term spot interest rates to refer to the default - free zero- coupon yields.
Explain what you see from the pricing calculations. How do the two bonds differ? Bond C Bond Price = PV(rate,nper,pmt,fv) Given: n = Period which takes values from 0 to the nth period = 0,1,2,3 & 4 Cn = Coupon payment in the nth period = 10%*$1,000 = $100 YTM = interest rate or required yield = 9.6% P = Par Value of the bond = $1,000 Bond Z Bond Price = PV(rate,nper,pmt,fv) Given: n = Period which takes values from 0 to the nth period = 0,1,2,3 & 4 Cn = Coupon payment in the nth period = 0%*$1,000 = $0.00 YTM = interest rate or required yield = 9.6% P = Par Value of the bond = $1,000 years Bond A Bond Z 4 $1,012.79 $693.04 3 $1,010.02 $759.57 2 $1,006.98 $832.49 1 $1,003.65 $912.41 0 $1,000.00 $1,000.00
Which statement is false? O A. As the term of a bond approaches zero, the price approaches kar. O B. For corporate and government bonds, the coupon payments amortize the princi OC. Overall, bond prices are less volatile than stock prices. O D. The coupon on a bond is expressed as a percentage of face value. O E. Corporate bonds can be bought and sold in the secondary market. Reset Selection
H4. Which statement is true? a. Duration is good for estimating the impact of large interest rate changes. b. The duration estimate is less accurate, the less convex the bond price/yield relationship. c. Effective duration is used to measure the price risk of the bonds with call options. d. The tangent line always overestimates the actual price
Calculating the risk premium on bonds The text presents a formula where (1+1) = (1-p)(1 +i+x) + p(0) where i is the nominal interest rate on a riskless bond x is the risk premium p is the probability of default (bankruptcy) If the probability of bankruptcy is zero, the rate of interest on the risky bond is When the nominal interest rate for a risky borrower is 8% and the nominal policy rate of interest is 3%, the probability of bankruptcy is %. (Round your response to two decimal places.) When the probability of bankruptcy is 6% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) When the probability of bankruptcy is 11% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) The formula assumes that payment upon default is zero. In fact, it is often positive. How would you change the formula in this case?…
с. • What is the Modified duration of a portfolio with one 2-year 10% semi-annual coupon bond and three 3-year 10% semi-annual bond when the required yield is 10%? Answer: — - Both bonds are trading at par, so their prices are equal (to par value) and portfolio weights are (4, 34) From Example 3.2 and Exercise 3.1, the modified durations of these two bonds are 1.77 and 2.54, respectively - Modified Duration of this portfolio = 1

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