financial analysis

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Submit type written (words processed) answers. Please answer questions fully. Definition type answers will not be accepted and/or will not earn any credit. Please Staple your answers and DONOT place them in any cover. 1. You bought AAA bonds yielding 5% with 20 years to maturity when the interest rates were 4%. After 8 years you sold these bonds when inter rates were 8% Compute the gain or loss on this transaction, interest compounded annually? 2. A 10% bond pays annually matures in 12 years. The bond is currently selling for $1,071.60. What is the bond’s yield to maturity? 3. ShuMae purchased a bond that offered an YTM of 10%. The bond had 5 years to maturity and the company paid coupons and the principal as scheduled during the 5 years. ShuMae, a graduate of ulv saved these coupons in her saving account that paid 5% annual rate. ShuMae is happy that although interest rates had dropped considerably in the 5 years, she was still able to earn 10% average return on her bond investment. How would you respond to Alia? 4. You are interested in 9.5% preferred, par 50. Similar-risk preferred are currently yielding 10.7%. How much are you willing to pay for this stock? 5. A 5% preferred stock with a par of 100 is currently for $105 with a current yield (cost) of 4.76%. Investment bankers advised the firm that a new preferred if issued will require a yield (cost to the firm) of 6%. What is the floatation percentage? 6. A company is selling $50 million in new bonds. ML Inc. the managing underwriter has 40 per cent participation in the syndicate it has formed. The syndicate will buy the bonds from the company at $986 per bond. And sell them to the public for $996 each. The selling concession will be $5 per bond. The issue will generate administrative expenses of $100,000. ML requires a manager’s fee of 12 percent of the gross spread. How much will ML receive if the issue is a sell out? (From IB compensation handout Problem ) 7. Discuss the impact of issuance of securities on the capital markets. 8. What is rule 415 and 144? Explain fully how it helps the firm in their issuance of securities? 9. Discuss the role of investment banker in issuance of common stock. 10. Explain the following: a. Gross underwriting spread and its various components. b. Road show c. Building the book d. Green shoe provision
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Running Head: FINANCIAL ANALYSIS
1.

1

You bought AAA bonds yielding 5% with 20 years to maturity when the interest rates

were 4%. After 8 years you sold these bonds when inter rates were 8% Compute the gain or loss
on this transaction, interest compounded annually?
Coupon rate= 5%
=0.05
1+0.05=1.05
1.05*1.05=1.1025
1.1025*1000= $1102.5
Gain from the bond $1000-$1102.5=$102.5

.

Subtract the price you paid for the bond from its selling price. For example, if you buy the bond
for $7,400 and sell it for $7,000, subtract $7,400 from $7,000 to get -$400. This is your profit
from trading the bond.

2.

A 10% bond pays annually matures in 12 years. The bond is currently selling for

$1,071.60. What is the bond’s yield to maturity?
YTM=Time period* /Face value\Present value-1

FINANCIAL ANALYSIS

2

Face value=0.1*1071.60
=107.16
YTM=12 *square root of face value/present value-1
=2.794%
=3%

3.

ShuMae purchased a bond that offered an YTM of 10%. The bond had 5 years to

maturity and the company paid coupons and the principal as scheduled during the 5 years.
ShuMae, a graduate of ulv saved these coupons in her saving account that paid 5% annual rate.
ShuMae is happy that although interest rates had dropped considerably in the 5 years, she was
still able to earn 10% average return on her bond investment. How would you respond to Alia?
Alia capability to earn from the bonds was due to the fact she saved the payments of the coupons
in a savings account that relatively earns better interest than an ordinary account. The main
earning was mainly from the earning from the coupons and there she got the target through booth
the interests as well as the value of coupons. It is possible to get a return on the bond through the
coupons even if the interest rates are low since she saved the coupons in a savings account and at
the same time received the principal.

4.

You are interested in 9.5% preferred, par 50. Similar-risk preferred are currently yielding

10.7%. How much are you willing to pay for this stock?

FINANCIAL ANALYSIS

3

Cost of preferred stock=Annual dividend on stock/Current market price of stock
Annual dividend rate= coupon rate* par value
9.5%*50= $475
10.7%*50=$535

5.

A 5% preferred stock with a par of 100 is currently for $105 with a current yield (cost)

of 4.76%. Investment bankers advised the firm that a new preferred if issued will require a yield
(c...


Anonymous
Really useful study material!

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