Finance bonds

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  1. A bond with face value $1,000 and annual coupon rate 5% has dirty price

$1,050. There are 5 more coupon payments yet to be paid, the first one

arriving in 150 days’ time. What is the clean price for the bond? (9 marks)

  1. A portfolio has beta (𝛽) of 1, expected return 9%, Jensen’s alpha

equal to 𝛼, idiosyncratic variance 𝑉ar(𝜖), and total variance equal to 0.11.

The risk-free rate (𝑟𝐹) is 3%, the average return on the market index (𝐸(𝑟𝑀))

is 7%, and the variance of the market index (𝑉ar(𝑟𝑀)) is 0.09.

Use the Treynor-Black model/formula that gives the optimal mix of the portfolio

with the market index. According to this model, how much of your wealth

should be invested in the portfolio described above, and how much should

be invested in the market portfolio?

Sample Solution

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Killing privacy

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Foer clearly believes that the Internet is killing privacy. How does he see the Internet as doing so? In other words, what are the specific threats that come from the internet, and why should they be considered threats?
What is your response to Foer’s analysis of how the Internet is killing privacy? Do you agree or disagree with Foer? Why or why not? And what is your response to his proposal for dealing with the threat? Do you believe it is necessary? Sufficient? Possible? Why or why not?
Foer proposes a way of addressing the threat he argues the Internet poses. What specific evidence or criteria does he use in establishing the existence of an actual threat? What specific evidence or criteria does he offer in support of his proposal? Evaluate these sets of evidence and criteria.

Sample Solution

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Coupon Bonds

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  1. The price of a 1-year zero coupon bond is 97% of the face value, the prices

of corresponding 2-year and 3-year bonds are 96% and 91%, respectively.

You are offered an opportunity to borrow $1m in year 1 (one year from now).

The loan requires annual coupon payments of 4% of $1m in years 2 and 3,

and you must repay the capital of $1m in year 3. Should you accept this

offer?

  1. The Sharpe ratio and Jensen’s alpha of portfolio A are 0.10 and 0.004,

respectively. The risk-free rate is 3%, the average return on the market

portfolio is 7%, the variance of the market portfolio is 0.09, and the

correlation coefficient between A and the market portfolio is 0.7. What is the

expected return and the variance of A

Sample Solution

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The Experiential Essay with Sources

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Length: 2000 words (including bibliography)

Sources:  at least 4 from your annotated bibliography; you can also bring in other sources

MLA Format for page style, in-text citation style and works cited page.

All sources provided, but you can also bring in other sources