Tag: Investment

Investment Banks and Financial Institutions

Investment Banks & Financial Institutions
Investment Banks & Financial Institutions

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Investment Banks and Financial Institutions

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Investment Banks and Financial Institutions

1. Answer questions 4-8 in the attached document. 
2. Answer Problems 35, 37, 39, and 41 in the attached documents then answer them again using the below scenarios. 
3. Redo problem 35, assuming a coupon rate of 8% in part a, and yields to maturity of 12 and 12.5% in part b ?
4. Repeat problem 37, assuming that the zero coupon bond has 7 years to maturity.
5. Repeat problem 39, assuming that the three bonds under consideration have 6 years to maturity.
6. Repeat problem 41, assuming that the fair present value rose from $975 to $ 990.

Investment banking is the division of a bank or financial institution that serves governments, corporations, and institutions by providing underwriting (capital raising) and mergers and acquisitions (M&A) advisory services. Investment banks act as intermediaries between investors (who have money to invest) and corporations (who require capital to grow and run their businesses).

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Investment Banks and Financial Institutions

PART 1
Questions 4 to 8
Question 4
Identify whether a bond will be considered a premium bond, a discount or a par bond
a) A bond with a market price higher than its par value is a premium bond
b) A bond with a coupon rate equals to its yield to maturity is considered a par bond
c) A bond with a coupon rate less than the required rate of return is considered a discount bond
d) A bond whose coupon rate is less than its yield to maturity is considered a discount bond
e) A bond whose coupon rate is greater than its yield to maturity is considered a premium bond
f) a bond whose fair value is less than its face value is considered a discount bond

Question 5
How equity valuation differ from bond valuation
Valuation of equity onsiders dividend on stock, growth rate, rate of return. These considerations are appropriate where an entity uses dividend growth model
formular where dividend growth factor is equal throughout: Po = D1/r – g
where dividend growth factor is not equal: Po = {Dn (1 + gn)/r – g} (1/(1 + r)n)
Valuation of bond considers bond coupon rate, investors required rate of return, maturity value and maturity period
Formulae = (Intr x PVAF) + (MV x PVIFrn)

Question 6
What happens to the fair present value of a bond when the required rate of return on the bond increases
An increase in required rate of return lowers the fair present value of a bond

Question 7
A change in interest rate affects the price of of both short and long because change in interest rate affects the yield of both and long and short-term loan
Long-term bond’s price is more affected by increase in interest rate due to long duration they cove

Question 8
Bond’s price with large coupon rate are affected with the change in interest rates more than bond’s price with a small interest rate.
This is because large coupon rate reduces bond’s price by a larger margin.

Investment Banks and Financial Institutions

PART 2
Aswer problems
Problem 35
a) what is the duration of a five year treasury bond with a 10% semi-annual selling at per
periods = 2 x 5 years = 10 periods
par value= $1000
coupon = 10%/2 = 5%
interest = 5% x 1000 = 50
bond = (50 x PVIF 10 periods @ 5%) + (1050 x PVIF10 periods @5%) =
= 47.62 + 952.38 X10 = $9571.42
Price = 952.38 + 47.62 = $1000
period = 9571.42/1000 = 9.57/2 = 4.78

b) duration if the yield to maturity increases to 14% and 16%
1st period interest 14% x 1000 x 1/1+0.14 = 122.81
2nd (140 + 1000 ) x 0.7695 = 877.19
(877.19 x 10 ) + 122.81 = $8894.71
price = 1000
8894.71/1000 = 8.89/2 = 4.4 YEARS

At 16%
1st period interest 16% x 1000 x 1/1+0.16 = 137.93
2nd (160 + 1000 ) x 0.7432 = 862.07
(862.07 x 10 ) + 137.93 = $8758
price = 1000
8758.62/1000 = 8.75/2 = 4.3 years

c) Conclusion
An increase in bond yield to maturity reduces the duration of a bond. This is because an increased yield to maturity increases the cash inflow hence reducing the period of maturity

Problem 37
Duration of zero coupon bond that has eight years to maturity
The duration of a bond with a zero coupon rate is the same its maturity date. Thus the duration of the bond is 8 years
if the duration of maturity increases to 10 years, bo nd duration will be 10 years
if the maturity increases to 12 years, bond duration will be 12 years

Problem 39

a) At 8%
interest = 8% x 10000 = 800
1st 800 x 0.9259 = $740.74
2nd (800 + 10000) x 0.8573 = 9259.26
total = (9259.26 x 5) + 740.74 = $47036.29/10000 = 4.7 years

b) at 10%
interest = 10% x 10000 = 1000
1st 1000 x 0.9091 = $909.10
2nd (1000 + 10000) x 0.8264 = 9090.91
Total = (9090.91 x 5) + 909.1 = $46363.65/10000 = 4.6 years

c) coupon rate 12%
interest = 12% x 10000 = 1200
1st 1200 x 0.8929 = $1071
2nd (1071 + 10000) x 0.7972 = 8825.73
Total = (8825.73 x 5) + 1071= $45199.67/10000 = 4.5 years

Problem 41
At 9.75%
interest = 9.75% x 975 = $95.06

at 9.25%
interest = 9.25% x 995 = $92.04
995/92.04 = 974/95.06 = 10 years

Investment Banks and Financial Institutions

PART 3
Problem 35
a) Coupon rate of 8%
interest = 8% x 1000 = 80
1st 80 x 0.9259 = $74.07
2nd (80 + 1000) x 0.8573 = 925.92
total = (925.92 x 5) + 74.07 = $4703.63/10000 = 4.7 years

b) yield to maturity is 12%
interest = 12% x 1000 = 120
1st 120 x 0.8929 = $107.1
2nd (107.1 + 1000) x 0.7972 = 882.57
Total = (882.57 x 5) + 107.1= $4519.96/1000 = 4.5 years

Yield to maturity is 12.5%
interest = 12.5% x 1000 = 125
1st 125 x 0.8889 = $111.1
2nd (111.1 + 1000) x 0.7901 = 877.91
Total = ( 877.91 x 5) + 111.1= $4500.63/1000 = 4.5 years

Investment Banks and Financial Institutions

PART 4
Problem 37
Duration of zero coupon bond that has seven years to maturity
The duration of a bond with a zero coupon rate is the same its maturity date. Thus the duration of the bond is 7 years
if the duration of maturity increases to 10 years, bo nd duration will be 10 years
if the maturity increases to 12 years, bond duration will be 12 years

PART 5
Repeat problem 39,assuming that the three bonds under consideration have 6 years to maturity.

a) At 8%
interest = 8% x 10000 = 800
1st 800 x 0.9259 = $740.74
2nd (800 + 10000) x 0.8573 = 9259.26
total = (9259.26 x 6) + 740.74 = $56296.3/10000 = 5.6 years

b) at 10%
interest = 10% x 10000 = 1000
1st 1000 x 0.9091 = $909.10
2nd (1000 + 10000) x 0.8264 = 9090.91
Total = (9090.91 x 6) + 909.1 = $55455.37/10000 = 5.5 years

c) coupon rate 12%
interest = 12% x 10000 = 1200
1st 1200 x 0.8929 = $1071
2nd (1071 + 10000) x 0.7972 = 8825.73
Total = (8825.73 x 6) + 1071= $54025.38/10000 =5.4 years

Investment Banks and Financial Institutions

PART 6
Repeat problem 41, assuming that the fair present value rose from $975 to $ 990

duration = 990/9.25 = 10.7 years

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Banking and Financial Institutions

Banking and Financial Institutions
Banking and Financial Institutions

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Banking and Financial Institutions

Question 1

Capital markets refer to the financial markets where debt and equity instruments with maturities of more than one year are traded. Bond markets are part of the capital markets…

Question 2

T-bills are a short term financial instrument used by the government to source for revenue in order to cover for shortfalls. They are sold through an auction, issued in multiples of $1000…

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Question 3

A STRIP (Separate Trading of Registered Interest and Principal Securities) is a form of a treasury financial security whose…

Question 4

Investing in TIPS bonds has the advantage of having their returns based on…

Question 5

Bearer bonds refer to a type of bond where the coupon is attached to the bond and is, therefore, payable to the…

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The Investment Detective Essay

The Investment Detective
The Investment Detective

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The Investment Detective

Case Study

Objective of the case:

This case presents the cash flows of eight unidentified investments, all of equal initial investment size. Your task is to rank the projects. The first objective of the case is to examine critically the principal capital-budgeting criteria.

A second objective is to consider the problem that arises when net present value (NPV) and internal rate of return (IRR) disagree as to the ranking of two mutually exclusive projects.

Finally, the case is a vehicle for introducing the problem created by attempting to rank projects of unequal life and the solution to that difficulty—the equivalent-annuity criterion.

The Investment Detective

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Assignments:

Fill the yellow part of the excel sheet. And then answer the following questions:

1)  Which of the two projects, 7 or 8, is more attractive?

a. How sensitive is our ranking to the use of high discount rates?

b. Why do NPV and IRR disagree?

2)   What rank should we assign to each project?

a. Why do payback and NPV not agree completely?

b. Why do average return on investment and NPV not agree completely?

c. Which criterion is best?

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3)   Are those projects comparable based on NPV?

a. Because the projects have different lives, are we really measuring the “net present” value of the short-lived projects?

4)   What is the equivalent-annuity method and when is it called for in project comparisons?

The key points ABOUT capital budget should be the following:

  • IRR: Possibly incorrect opportunity cost assumption. Violates value additivity. Multiple IRRs are possible.
  • NPV: May be difficult to explain.
  • ROI: Often computed on profits, not cash flow. Ignores time profile of flows and the time value of money.
  • Payback: Ignores time value of money, although it is a proxy for the liquidity or duration of an investment and is sometimes used in conjunction with NPV.

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Investment Timing

Investment Timing
Investment Timing

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Investment Timing

The concept of investment timing is directly connected to the business life cycle. These are connected since there is evidence that the stock prices anticipate changes in the business life cycle by period of up to six months at a time (Bodie, Kane, & Marcus, 2013). In this regard, investors will usually perceive changes and act accordingly.

Once they perceive an impending a boom, stocks are purchased since they are not vulnerable to a recession. Once they perceive a downturn, they sell off the stocks and replace their portfolios with fixed income securities. Towards the end of a recession, the investor sells the fixed income securities and replaces them with stocks.

In the case of Universal Auto, and if the assertion by Adam is correct, the ideal time to invest in the stock of the passenger car company would be towards the end of a recession. If as per Adam’s statement, the recovery is underway, the stock should currently be indicative of the better tidings in terms of economic recovery, and this would be the perfect time to purchase the stocks of the passenger car company.

References

Bodie, Z., Kane, A., & Marcus, A. J. (2013). Essentials of Investments. New York: McGraw-Hill/Irwin.

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The Investment Detective: Case Study

The Investment Detective
The Investment Detective

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The Investment Detective

Objective of the case:

This case presents the cash flows of eight unidentified investments, all of equal initial investment size. Your task is to rank the projects. The first objective of the case is to examine critically the principal capital-budgeting criteria.

A second objective is to consider the problem that arises when net present value (NPV) and internal rate of return (IRR) disagree as to the ranking of two mutually exclusive projects.

Finally, the case is a vehicle for introducing the problem created by attempting to rank projects of unequal life and the solution to that difficulty—the equivalent-annuity criterion.

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Assignments:

Fill the yellow part of the excel sheet. And then answer the following questions:

1)  Which of the two projects, 7 or 8, is more attractive?

a. How sensitive is our ranking to the use of high discount rates?

b. Why do NPV and IRR disagree?

2)   What rank should we assign to each project?

a. Why do payback and NPV not agree completely?

b. Why do average return on investment and NPV not agree completely?

c. Which criterion is best?

3)   Are those projects comparable based on NPV?

a. Because the projects have different lives, are we really measuring the “net present” value of the short-lived projects?

4)   What is the equivalent-annuity method and when is it called for in project comparisons?

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The key points ABOUT capital budget should be the following:

  • IRR: Possibly incorrect opportunity cost assumption. Violates value additivity. Multiple IRRs are possible.
  • NPV: May be difficult to explain.
  • ROI: Often computed on profits, not cash flow. Ignores time profile of flows and the time value of money.
  • Payback: Ignores time value of money, although it is a proxy for the liquidity or duration of an investment and is sometimes used in conjunction with NPV.

The Investment Detective

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Principle Investments Essay Paper

Principle Investments
Principle Investments

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Principle Investments

US President Donald Trump, in a meeting at the White House on February 27, 2018, ordered the imposition of stiff and strict tariffs on the importation of steel and aluminum. The move, seen as a hallmark of keeping his campaign promises is bound to have numerous effects the world over. In its wake, the imposition of tariffs is expected to rattle the stock markets and cause trade wars between the US and several of its trade allies, especially in the European and Asian regions (Swanson, 2018; Jacobs & Deaux, 2018).

In my opinion, the imposition of such tariffs should be handled with a softer approach. President Trump should initiate discussions and negotiations with the US trade partners and strike a deal rather than suddenly bombard them with such news.

The announcement to impose a 25% tariff on steel and 10% on aluminum imports, despite the expected wrangles, will have a few winners. First is the US steel makers, who in spite of a rising demand, have not been able to meet the demand, resulting in the importation of more steel. A second category is the factory workers in steel and aluminum manufacturing plants. This category of beneficiaries may find more and better jobs.

Principle Investments

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The losers in this announcement include the United States’ trade partners who have been importing steel and aluminum. This list includes Brazil, China, Mexico, and Canada. Asian steel makers have been having a rough time over the past few years, and this announcement is bound to add to their operational and financial woes. A third loser in the development is the relationships that the US has built for a long time, which may end once the tariffs are put in place. In addition, the US steel and aluminum secondary users may get losses on the high costs of importations if the local producers cannot meet the demands.

References

Jacobs, J., & Deaux, J. (2018, March 1). Trump Expected to Announce Stiff Steel, Aluminum Tariffs. Retrieved from Bloomberg – Politics: https://www.bloomberg.com/news/articles/2018-03-01/trump-is-said-to-likely-impose-stiff-steel-aluminum-tariffs

Swanson, A. (2018, March 1). Trump to Impose Sweeping Steel and Aluminum Tariffs. Retrieved from The New York Times: https://www.nytimes.com/2018/03/01/business/trump-tariffs.html

Principle Investments

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Investment Analysis

Investment Analysis
Investment Analysis

Investment Analysis

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For this part of the assessment, imagine that you are looking into investing in a manufacturing company, such as a car company or a steel company. Your goal is to create a plan for determining the potential strength of an investment in the company (investment analysis) and determining how the company might perform over a selected period of years (forecast).

After considering a potential investment in this manufacturing company, address the following:

  • What are some of the qualitative factors that must be considered when selecting a company in which to invest?
  • What financial ratios would you examine, and why?
  • What non-financial factors would you examine, and why?

Use research from at least two references to support your ideas.

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Library Resources
  • Brigham, E. F., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.). Boston, MA: Cengage.

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Real Risk-Free Rate of Return

Real Risk-Free Rate of Return
Real Risk-Free Rate of Return

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Real Risk-Free Rate

Current 30-day T-bills are yielding 3.5 percent. Your accountant provided you with these interest rate premiums:

  • IP = 1.5%
  • LP = 0.6%
  • MRP = 1.8%
  • DFP = 2.15%

What is the real risk-free rate of return based on this data?

The risk-free rate of return is the theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.

The so-called “real” risk-free rate can be calculated by subtracting the current inflation rate from the yield of the Treasury bond matching your investment duration.

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Expected Interest Rate

Expected Interest Rate
Expected Interest Rate

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Expected Interest Rate

For this problem, examine Treasury securities. Considering the following numbers, what would the yield on 3-year Treasury securities be?

  • Real risk-free = 4%.
  • Inflation expected at 1.5% for this year and 2% for the next 2 years.
  • Maturity risk premium = 0.
Treasury Securities

Treasury securities—including Treasury bills, notes, and bonds—are debt obligations issued by the U.S. Department of the Treasury. Treasury securities are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.  The income from Treasury securities may be exempt from state and local taxes, but not from federal taxes.

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