FINANCE Investment Analysis and Portfolio Management CHAPTER 18 QUESTIONS
1 Why does the present value equation appear to be more useful for the bond investor than for the common stock investor?
2. What are the important assumptions made when you calculate the promised yield to maturity? What are the assumptions when calculating promised YTC?
3. a. Define the variables included in the following model ：
i =(RFR,I,RP)
b. Assume that the firm whose bonds you are considering is not expected to bleak even this year. Discuss which factor will be affected by this information.
4. We discussed three alternative hypotheses to explain the term structure of interest rates. Briefly discuss the three hypotheses and indicate which one you think best explains the alternative shapes of a yield curve.
7. You expect interest rates to decline over the next six months
a. Given your interest rate outlook, state what kinds of bonds you want in your portfolio in terms of duration and explain your reasoning for this choice.
b. Y ou must make a choice between the following three sets of noncallable bonds. For each set select the bond that would be best for your portfolio given your interest rate outlook and the consequent strategy set forth in Part a. In each case briefly discuss why you selected the bond.
Bonds; Maturity; Coupon; Yield to Maturity
Set 1 ： Bond A 15 years 10% 10%
Bond B 15 years 6% 8%
Set 2 ： Bond C 15 years 6% 10%
Bond D 10 years 8% 10%
Set 3 ： Bond E 12 years 12% 12%
Bond F 15 years 12% 8%
8. At the present time, you expect a decline in interest rates and must choose between two portfolios of bonds with the following characteristics ：
Portfolio A Portfolio B
Average maturity 10.5 years 10.0 years
Average YTM 7% 10%
Modified duration 5.7 years 4.9 years
Modified convexity 125.18 40.30
Call features Noncallable Deferred call features that range from 1 to 3 years Select one of the portfolios and discuss three factors that would justify your selection.
9. The Chartered Finance Corporation has issued a bond with the following characteristics ： Maturity--25 years
Coupon--9%
Yield to maturity--9%
Callable--after 3 years@109
Duration to maturity--8.2 years
Duration to first call--2.1 years
a. Discuss the concept of call-adjusted duration and indicate the approximate value (range) for it at the present time.
b. Assuming interest rates increase substantially (i.e., to 13 percent), discuss what will happen to the call-adjusted duration and the reason for the change.
c. Assuming interest rates decline substantially (i.e., they decline to 4 percent),discuss what will happen to the bond's call-adjusted duration and the reason for the change.
d. Discuss the concept of negative convexity as it relates to this bond.
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