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This will be graded It is due by the end of class on Monday Feb 13 No credit for late assignments On January 15 2017 Huskies Inc a company founded by a USM graduate donated $10 million to SM

This will be graded. It is due by the end of class on Monday Feb. 13. No credit for late assignments On January 15, 2017, Huskies Inc., a company founded by a USM graduate, donated $10 million to SM to fund scholarships for students in the business school. U has hired your investment firm to manage an endowment funded by the gift. You work in the bond research department. The head portfolio manager has asked you to evaluate several bonds for potential purchase. All bonds were issued yesterday. Bond A is a 5 year$1,000 par value 3% annual coupon U.S. Treasury bond. Bond B is a 5 year $1,000 par value 6% annual coupon BBB rated corporate bond. Bond Cis a 3 year $1,000 par value 3% annual coupon BBB rated corporate bond. All three bonds are trading at $900 per bond The firm's economics team has updated its economic forecasts for the next five years and shared the assumptions with your department. The fixed income department's valuation model estimates th maturity risk premium for all bonds using the following formula: 0.1% (t-1), t-years to maturity. The firm uses a simple average of expected U.S. inflation to determine the inflation premium over the remaining years to maturity and 1% as the real risk free rate. U.S. treasury bonds have no default risk. The firm uses the required return formula taught in the USM Financial Management 320 class and will purchase a bond when it reaches a price at or below the price calculated using the required return from the formula below as the discount rate Required return real risk free rate IP (inflation premium) DRP (default risk premium LP (liquidity premium) MRP (maturity risk premium) Historical Economic Data 2017 2018 2019 2020 2021 Average U.S. Inflation 2.0% 2.5% 3.0% 30% 3.0% 3.0% 35% 40% 4.5% 45% 45% 80% Education Inflation 0.5% 0.5% 0.5% 0.5% 05% Corporate Default Rate 1.0% Treasury Default Rate 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Investment Data Real risk free rate 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% BBB Rated Bond Default Risk Premium 2.0% Treasury Liquidity Premium 0.0% 15% BBB Rated Liquidity Premium

 

Apr 04 2020 View more View Less

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