FIR 3410 Homework Assignment: Markets and Securities Analysis, Assignments of Corporate Finance

Download FIR 3410 Homework Assignment: Markets and Securities Analysis and more Assignments Corporate Finance in PDF only on Docsity! FIR 3410, Section 2 Due October 21, 2002 Homework Assignment - Chapters 5 and 6 1. Explain the differences between each type of the following markets: a. Money vs. Capital b. Primary vs. Secondary c. Spot vs. Futures d. Public vs. Private e. NYSE vs. NASDAQ 2. Suppose you and most other investors expect the inflation rate to be 4% next year, to fall to 3% during the following year, and then to remain at a rate of 2% thereafter. Assume that the risk free rate, k*, will remain at 1.5% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds to a level of 0.2% for 1 year securities. In addition, maturity risk premiums increase 0.2% for each year to maturity. a. Calculate the interest rate on 1-, 2-, 3-, 5-, 10-, and 20-year Treasury securities, and plot the yield curve. b. Now suppose Exxon Mobil, an AAA-rated company, has bonds with the same maturity as the Treasury bonds. As an approximation, plot the yield curve for Exxon Mobil on the same graph with the Treasury bonds yield curve. 3. The following table shows the expected rate of return given states of economy: State of Economy Prob. T-Bill High Tech Recession 0.2 8.0% -22.0% Average 0.6 8.0 20.0 Boom 0.2 8.0 50.0 1.0 a. Calculate expected rate of return for T-Bill and High Tech firm b. Calculate standard deviation for T-Bill and High Tech firm c. Calculate expected rate of return for portfolio of T-Bill and High Tech firm, assuming equal weights (50% in T-Bill and 50% in High Tech firm) 4. Use the following information to answer question 3. Current stock price $ 100 Expected stock price one year from now $ 110 Expected dividend during the year $ 5