FM430 - Corporate Finance and Asset Markets - Finance Assignment Help

Assignment Task

Question 1 Use discrete compounding of interest rates and assume that bond coupons are annual throughout this question.
a) Consider three bonds A, B, and C with face value £100. Bond A is a 2-year zero coupon bond. Bond B is a two-year bond with 10% coupon rate, and Bond C is a three-year bond with 20% coupon rate. The prices of bonds A, B, and C are £90, £108.5, and £133, respectively. Find the term structure of interest rates r1, r2, and r3, and forward rates 1f1, 2f1, 1f2, where tft denotes the forward rate between years t and t+t.
b) Discuss the expectations theory of the term structure. What are its main assumptions and implications? What are the expectations of investors about future interest rates if the term structure is upward sloping?
c) Consider an insurance company that needs to pay £10 mln in years 1, 2 and 3 from now. The term structure is flat at r=3% per year and only shifts in a parallel way (that is, the whole term structure shifts by some Dr). Consider also zero-coupon bonds maturing in years 1 and 2, respectively, and a three-year bond with 10% coupon rate. All bonds have face value £100. The company wants to buy these bonds to perfectly immunize its liabilities so that the cash flows generated by the portfolio of bonds perfectly match the cash flows of its liabilities. How many units of each bond does the company need to buy? The company has £29 mln in cash. Is this money enough to achieve perfect immunization?
d) What is the convexity of a bond? How and why does it help improve the approximation of the change in the bond’s value when the term structure shifts in a parallel way? Write down and explain the formula for the approximate change of the bond price in terms of duration and convexity. You do not need to provide the formula for the convexity itself.
e) XYZ corporation has return on equity (ROE) of 20% and its plowback ratio is p. The ROE and the plowback ratio are expected to stay the same in all future periods. The company's earnings are expected to be £4 per share next year. The cost of capital is 15%. What is the present value of growth opportunities of this corporation as a function of p? Calculate the present value of its growth opportunities for p=30%.
f) Tech Inc. is a high-growth technology company. It is expected to pay a dividend of £0.6 per share next year (year 1). This dividend is expected to grow at a rate of 12% per year thereafter until year 4 (dividend in year 4 is the last dividend calculated using 12% growth rate). After that, growth will level off at 2% per year. The cost of capital of Tech Inc. is 8%. What is the price per share of Tech Inc. in year 0?

Question 2
Use discrete compounding of interest rates throughout this question.
a) The current price of stock XYZ is £100. In each period it either goes up by 10% or down by 10%. Assume that the stock does not pay dividends. The riskless interest rate per period is 2%. Construct a binomial tree with two periods and three dates (t=0, 1, 2) for the stock price movements. Calculate the risk neutral probabilities of the up and down moves. Calculate the time-0 price of an American put option with a strike price of £95 and maturity at the final date t=2 written on this stock.
b) Consider the same stock with the same binomial tree as in part a). Assume now that the riskless interest rate per period is 5%. Find the price of an American put option with the same strike of £95 as before. Under which riskless rate, 2% (as in part a) or 5%, is the early exercise of the American put more likely? What is the intuition for the effect of interest rates on the decision to exercise?
c) Consider European call and put options with the strike price of £90 and maturity T=1 year written on stocks of ABC corporation. The options are currently traded at prices C(90)= £15.5 and P(90)= £1.2, respectively. The prices of European call and put options with the strike price of £100 and maturity T=1 year written on the same stock are traded at prices C(100)= £7.8 and P(100)= £4, respectively. The riskless interest rate is r=5% per year. Is there an arbitrage opportunity? If so, how would you construct an arbitrage strategy? Hint: use put-call parity.

This FM430 - Finance Assignment has been solved by our Finance experts at My Uni Paper. Our Assignment Writing Experts are efficient to provide a fresh solution to this question. We are serving more than 10000+ Students in Australia, UK & US by helping them to score HD in their academics. Our Experts are well trained to follow all marking rubrics & referencing style.
Be it a used or new solution, the quality of the work submitted by our assignment experts remains unhampered. You may continue to expect the same or even better quality with the used and new assignment solution files respectively. There’s one thing to be noticed that you could choose one between the two and acquire an HD either way. You could choose a new assignment solution file to get yourself an exclusive, plagiarism (with free Turnitin file), expert quality assignment or order an old solution file that was considered worthy of the highest distinction.