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1. Suppose you buy a 10 year 7% annual bond for...

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1. Suppose you buy a 10 year 7% annual bond for $960. Suppose you hold the bond for 5 years and sell it for $1060. Assuming you reinvested the coupon payments you receive at 6%, what was your total return? (25 points) 2. Suppose you purchase a 5 year 5% annual bond that has a YTM of 6%. What is the duration of this bond? Estimate the change in the price of this bond for a 50 basis point increase in the YTM. Estimate the change in the price of this bond for a 50 basis point decrease in the YTM. (25 points) 3. What are the collateralized mortgage obligations? How they are different from pass through securities? Why do some economists say CMOs are the one of the reasons for the recent financial crisis? (15 points) 4. When would you buy a call option and when would you buy a put option? In other words, how would you expect the underlying stock price move when you buy a call option and a put option? (15 points) 5. Wisteria Lane Cleaning System announced today a $1 per share dividend to be paid a year from now and expect the dividend to increase by $1 a year for another 2 years. After the third year, dividend growth is expected to settle down to steadier rate of 4%. If the required rate of the return of the company is 7%, what must be the price of the stock? (20 points)

 

Paper#9594 | Written in 18-Jul-2015

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