固定收益证券的小组作业5

Group Assignment 5 Due on December 13th  1.Theon-the-runissuefortheInc.NetCompanyisshownbelow:Usingthebootstrappingmethodology,thespotratesare:Assuminganinterestratevolatilityof10%forthe1-yearrate,thebinomialinterestratetreeforvaluingabondwithamaturityofuptothreeyearsisshowbelow:A.Demonstrateusingthe2-yearon-the-runissuethatthebinomialinterestratetreeaboveisinfactanarbitrage-freetree.B.Demonstrateusingthe3-yearon-the-runissuethatthebinomialinterestratetreeaboveisinfactanarbitrage-freetree.C.Usingthespotratesgivenabove,whatisthearbitrage-freevalueofa3-year8.5%couponissueofInc.NetCompany?D.Usingthebinomialtree,determinedthevalueofan8.5%3-yearoption-freebond.E.Supposethatthe3-year8.5%couponissueiscallablestartinginYear1atpar(100)(thatis,thecallpriceis100).Alsoassumethatthefollowingcallruleisused:ifpriceexceeds100theissuewillbecalled.Whatisthevalueofthis3-year8.5%couponcallableissue?F.Whatisthevalueoftheembeddedcalloptionforthe3-year8.5%couponcallableissue?2.FourportfoliomanagersarediscussingthemeaningofOAS.Hereiswhateachasserted:Manager1:“TheOASisameasureofthevalueoftheoptionembeddedinthebond.Thatis,itisthecompensationforacceptingoptionrisk.”Manager2:“TheOASisameasureofthespreadrelativetotheTreasuryon-the-runyieldcurveandreflectscompensationforcreditrisk.”Manager3:“TheOASisameasureofthespreadrelativetotheTreasuryon-the-runyieldcurveandreflectscompensationforcreditriskandliquidityrisk.”Manager4:“TheOASisameasureofthespreadrelativetotheissuer’son-the-runyieldcurveandreflectscompensationforcreditriskandliquidityrisk.”3.ConsidertheconvertiblebondbyMiserElectronics:Parvalue=$1,000Couponrate=8.5%Marketpriceofconvertiblebond=$900Conversionratio=30Estimatedstraightvalueofbond=$700AssumethatthepriceofMiserElectronicscommonstockis$25andthatthedividendpershareis$1perannum.A.Calculateeachofthefollowing:1)Conversionvalue2)Marketconversionprice3)Conversionpremiumpershare4)Conversionpremiumratio5)Premiumoverstraightvalue6)Favorableincomedifferentialpershare7)PremiumpaybackperiodB.SupposethatthepriceofthecommonstockofMiserElectronicsincreasesfrom$25to$54.1)Whatwillbetheapproximaterateofreturnrealizedfrominvestingintheconvertiblebondifaninvestorhadpurchasedtheconvertiblefor$900?2)Whatwouldbetherateofreturnrealizedif$25hadbeeninvestedinthecommonstock?3)Whywouldtherateofreturnbehigherbyinvestinginthecommonstockdirectlyratherthanbyinvestingintheconvertiblebond?C.Supposethatthepriceofthecommonstockdeclinesfrom$25to$10.1)Whatwillbetheapproximaterateofreturnrealizedfrominvestingintheconvertiblebondifaninvestorhadpurchasetheconvertiblefor$900andthestraightvaluedoesnotchange?2)Whatwouldbetherateofreturnrealizedif$25hadbeeninvestedinthecommonstock?3)Whywouldtherateofreturnbehigherbyinvestingintheconvertiblebondratherthanbyinvestinginthecommonstockdirectly?