1.Consider the following four debt securities, which are identical in every char
ID: 2670164 • Letter: 1
Question
1.Consider the following four debt securities, which are identical in every characteristic except as noted: ?W: A corporate bond rated AAA?X: A corporate bond rate BBB
?Y: A corporate bond rated AAA with a shorter time to maturity than bonds W and X
?Z: A corporate bond rated AAA with the same time to maturity as bond Y that trades in a more liquid market than bonds W, X, or Y
List the bonds in the order of its interest rate (yields to maturity) from highest to lowest. Explain your work.
2.Explain how an economist could use the slope of the yield curve to analyze the probability that a recession will occur and why the spread may matter.
3.One year ago, you bought a bond for $10,000. You received interest of $400 at the end of the year, as well as your $10,000 principal. If the inflation rate over the last year was five percent, calculate the real return. Show your work.
4.Suppose that the price of a stock is $50 at the beginning of a year and $53 at the end of the year, and it pays a dividend of $2 during the year. Calculate the stock’s current yield, capital-gains yield, and the return. Show your work for three separate calculations.
5.Use the capital-asset pricing model to predict the returns next year of the following stocks, if you expect the return to holding stocks to be 12 percent on average, and the interest rate on three-month T-bills will be two percent. Calculate a stock with a beta of -0.3, 0.7, and 1.6. Show your work for three separate calculations.
6.Use at least two (2) quality resources in this assignment.
Explanation / Answer
z, y, w, x YTM is a function of risk and time to maturity. As time to maturity increases, the required yield must increase as well. As Z has a short maturity, in a more liquid market, and is AAA rated, it will be the least risky, and thus have the lowest yield. y would be next highest, as it has a short maturity, but is in a less liquid environment, which means it must have a higher yield to compensate for liquidity issues. W is next highest because although it is AAA rated, it has a longer maturity than Z or Y. As such it must have a higher return to compensate the bond holders. X must have the highest as it is BBB rated and is the most risk of the bonds. with the same maturity as W
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