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Name
Fin 4432 Investments, Third Midterm Exam
(1) X Corporation issues 5 year bonds with an 8 percent coupon. The bonds initially sell at
par. (a) What is the Macaualay's Duration? (b) What is the Fogelberg's Duration of
these bonds? (c) According to Macaulay's Duration measure, what would be the
predicted percentage change in value of the bonds if the interest rate dropped by one
percent to 7 percent? (d) What is the actual change in the value of the bond, assuming
that interest rates fall by one percent? (e) And why is there a discrepancy between these
two numbers?
Period
1
CF
80
80
80
80
1080
PVIF
0.926
0.857
0.794
0.735
0.681
PVCF
74.07
68.59
63.51
58.80
735.03
1000
3
4
5
(a) Complete the spreadsheet to compute Macaualay's duration.
(b) Compute Fogelberg's Duration, showing all your steps. Note: You must show your
steps in order to gain full credit. If you use the calculator only, show the key strokes.
(c) What is the predicted percentage change, according to Macaulay's Duration? Again,
you must show all your steps in order to gain full credit.
Name
Fin 4432 Investments, Third Midterm Exam
(1) X Corporation issues 5 year bonds with an 8 percent coupon. The bonds initially sell at
par. (a) What is the Macaualay's Duration? (b) What is the Fogelberg's Duration of
these bonds? (c) According to Macaulay's Duration measure, what would be the
predicted percentage change in value of the bonds if the interest rate dropped by one
percent to 7 percent? (d) What is the actual change in the value of the bond, assuming
that interest rates fall by one percent? (e) And why is there a discrepancy between these
two numbers?
Period
1
CF
80
80
80
80
1080
PVIF
0.926
0.857
0.794
0.735
0.681
PVCF
74.07
68.59
63.51
58.80
735.03
1000
3
4
5
(a) Complete the spreadsheet to compute Macaualay's duration.
(b) Compute Fogelberg's Duration, showing all your steps. Note: You must show your
steps in order to gain full credit. If you use the calculator only, show the key strokes.
(c) What is the predicted percentage change, according to Macaulay's Duration? Again,
you must show all your steps in order to gain full credit.
(d) What is the actual percentage change? Show your steps, or keystrokes.
(e) Explain the discrepancy between the predicted and actual percentage change.
(2) Self-Fulfilling Belief: Growth through acquisition
Acquiring firm A has net income of 233 and has 100 shares outstanding. It sells for 10x
earnings. Target firm T has net income of 321 and has 100 shares outstanding. It sells
for 5x earnings. If A can acquired T in a stock for stock transaction and if investors still
believe that A is worth 10x earnings, show that its EPS will increase, and show what the
new price will be for the merged company. Show all of your calculations.
(3) Five years ago, X Corporation issued 15 year 8 percent bonds callable at 120 (percent)
after 5 years. Today, the interest rate on 10 year bonds is 4 percent. (a) Demonstrate
whether these bonds will, or will not, be called. (b) Demonstrate whether these bonds
will, or will not, be called if the market rate is 6 percent.
(a)
(9)
Name
Fin 4432 Investments, Third Midterm Exam
(1) X Corporation issues 5 year bonds with an 8 percent coupon. The bonds initially sell at
par. (a) What is the Macaualay's Duration? (b) What is the Fogelberg's Duration of
these bonds? (c) According to Macaulay's Duration measure, what would be the
predicted percentage change in value of the bonds if the interest rate dropped by one
percent to 7 percent? (d) What is the actual change in the value of the bond, assuming
that interest rates fall by one percent? (e) And why is there a discrepancy between these
two numbers?
Period
1
CF
80
80
80
80
1080
PVIF
0.926
0.857
0.794
0.735
0.681
PVCF
74.07
68.59
63.51
58.80
735.03
1000
3
4
5
(a) Complete the spreadsheet to compute Macaualay's duration.
(b) Compute Fogelberg's Duration, showing all your steps. Note: You must show your
steps in order to gain full credit. If you use the calculator only, show the key strokes.
(c) What is the predicted percentage change, according to Macaulay's Duration? Again,
you must show all your steps in order to gain full credit.
Name
Fin 4432 Investments, Third Midterm Exam
(1) X Corporation issues 5 year bonds with an 8 percent coupon. The bonds initially sell at
par. (a) What is the Macaualay's Duration? (b) What is the Fogelberg's Duration of
these bonds? (c) According to Macaulay's Duration measure, what would be the
predicted percentage change in value of the bonds if the interest rate dropped by one
percent to 7 percent? (d) What is the actual change in the value of the bond, assuming
that interest rates fall by one percent? (e) And why is there a discrepancy between these
two numbers?
Period
1
CF
80
80
80
80
1080
PVIF
0.926
0.857
0.794
0.735
0.681
PVCF
74.07
68.59
63.51
58.80
735.03
1000
3
4
5
(a) Complete the spreadsheet to compute Macaualay's duration.
(b) Compute Fogelberg's Duration, showing all your steps. Note: You must show your
steps in order to gain full credit. If you use the calculator only, show the key strokes.
(c) What is the predicted percentage change, according to Macaulay's Duration? Again,
you must show all your steps in order to gain full credit.
(d) What is the actual percentage change? Show your steps, or keystrokes.
(e) Explain the discrepancy between the predicted and actual percentage change.
(2) Self-Fulfilling Belief: Growth through acquisition
Acquiring firm A has net income of 233 and has 100 shares outstanding. It sells for 10x
earnings. Target firm T has net income of 321 and has 100 shares outstanding. It sells
for 5x earnings. If A can acquired T in a stock for stock transaction and if investors still
believe that A is worth 10x earnings, show that its EPS will increase, and show what the
new price will be for the merged company. Show all of your calculations.
(3) Five years ago, X Corporation issued 15 year 8 percent bonds callable at 120 (percent)
after 5 years. Today, the interest rate on 10 year bonds is 4 percent. (a) Demonstrate
whether these bonds will, or will not, be called. (b) Demonstrate whether these bonds
will, or will not, be called if the market rate is 6 percent.
(a)
Name
Fin 4432 Investments, Third Midterm Exam
(1) X Corporation issues 5 year bonds with an 8 percent coupon. The bonds initially sell at
par. (a) What is the Macaualay's Duration? (b) What is the Fogelberg's Duration of
these bonds? (c) According to Macaulay's Duration measure, what would be the
predicted percentage change in value of the bonds if the interest rate dropped by one
percent to 7 percent? (d) What is the actual change in the value of the bond, assuming
that interest rates fall by one percent? (e) And why is there a discrepancy between these
two numbers?
Period
1
CF
80
80
80
80
1080
PVIF
0.926
0.857
0.794
0.735
0.681
PVCF
74.07
68.59
63.51
58.80
735.03
1000
3
4
5
(a) Complete the spreadsheet to compute Macaualay's duration.
(b) Compute Fogelberg's Duration, showing all your steps. Note: You must show your
steps in order to gain full credit. If you use the calculator only, show the key strokes.
(c) What is the predicted percentage change, according to Macaulay's Duration? Again,
you must show all your steps in order to gain full credit.
(d) What is the actual percentage change? Show your steps, or keystrokes.
(e) Explain the discrepancy between the predicted and actual percentage change.
(2) Self-Fulfilling Belief: Growth through acquisition
Acquiring firm A has net income of 233 and has 100 shares outstanding. It sells for 10x
earnings. Target firm T has net income of 321 and has 100 shares outstanding. It sells
for 5x earnings. If A can acquired T in a stock for stock transaction and if investors still
believe that A is worth 10x earnings, show that its EPS will increase, and show what the
new price will be for the merged company. Show all of your calculations.
(3) Five years ago, X Corporation issued 15 year 8 percent bonds callable at 120 (percent)
after 5 years. Today, the interest rate on 10 year bonds is 4 percent. (a) Demonstrate
whether these bonds will, or will not, be called. (b) Demonstrate whether these bonds
will, or will not, be called if the market rate is 6 percent.
(a)
(9)