You are required to set up a separate worksheet (spreadsheet model) for each of the following two problems:
Question 1: Calculate the yield to maturity of a 7-year $1,000 par value bond with an annual coupon rate of 7.5% and a current price of $1,125. Provide the spreadsheet solutions for both annual and semi-annual payments of interest. Comment on the relationship between the yield to maturity and the timing of interest payments, providing an appropriate table or graph.
Question 2: Obtain from Bloomberg (or Datastream, or Thomson ONE Banker, or Yahoo!Finance) the beginning of month values for the period 2009-2012 of the Standard & Poor’s (S&P) SMALL CAP 600 Index and New York Stock Exchange (NYSE) World Leaders Index. Assume that you are a risk-averse investor.
For each of the two assets represented by the indices, calculate annual returns and build a frequency distribution of annual returns. Provide graphs of the distributions.
Explore the risk-return relationship for the two assets. Plot your results on a graph with the standard deviation of annual returns of each asset on the horizontal axis and the average annual return on the vertical axis, and comment on which asset performed better.
Assume that you form a portfolio by investing equal amount of money in each asset. Determine the average and standard deviation of the portfolio’s annual returns. Provide your interpretation of the risk and return of the equally-weighted portfolio compared to those of the individual assets.
Calculate and graph the average annual returns and standard deviations of all portfolios that are combinations of the S&P SMALL CAP 600 Index and NYSE World Leaders Index with the proportion of the S&P SMALL CAP 600 Index being 0, 10, 20, 30, 40, 50, 60, 70, 80, 90, 100%. Comment on the profile of the risk-return trade-off between the portfolios.
Indicative Reading:
A) For advice on design approaches that can assist with production of useful to financial managers Excel applications you might wish to consult Day’s Mastering Financial Modelling in Microsoft Excel and the latest edition of Benninga’s Principles of Corporate Finance with Microsoft Excel.
B) For working knowledge of the concepts and theories of corporate finance involved with this assignment you will need to read the relevant chapters of the latest edition of Corporate Finance by Berk and DeMarzo, the core text supporting BAM021 Corporate Finance.
C) Basic statistics concepts and Excel tools for basic statistical analyses are covered in Chapter 16 of Day’s Mastering Financial Mathematics in Microsoft Excel and in Chapter 9 of Benninga’s Principles of Corporate Finance with Microsoft Excel.