Beruflich Dokumente
Kultur Dokumente
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Time 1 2 3 4 100
Amount 4 4 4 109 80
60
Interest rate applying during year ending 40
31/12/2003 31/12/2004 31/12/2005 31/12/2006 20
n/a i2004 i2005 i2006 0
1 2 3 4
Accumulated amount
= 4 * ( 1 + i2004)(1 + i2005)(1 + i2006) Guess rolled up value: 109 plus about 2 yrs interest on payments of 12
+4* ( 1 + i2005)(1 + i2006) = approx 109 + 12 * (1.055, say)^2 = 122
+4* (1 + i2006)
+ 4 + 105
=, Since for independent random variables, E(AB) = E(A) x E(B), and E(constant) = constant
4 * ( 1 + E[i2004] )( 1 + E[i2005] )(1 + E[i2006] )
+ 4* ( 1 + E[i2005])(1 + E[i2006])
+4* (1 + E[i2006])
+ 4 + 105
Accumulated value at t = 8
= Integral (from t = 0 to 8)
0 5.0% of rate paid x Accumulation factor from t to 8
1 5.0%
2 5.0% = Integral (from t = 0 to 8)
3 5.0% of 50 x exp[ 0.05 x (8 - t) ]
4 5.0%
5 5.0% = 50 x exp [ 0.05 x 8 ] x Integral (from t = 0 to 8) of exp[ -0.05t ]
6 5.0%
7 5.0% = 50 x exp [ 0.05 x 8 ] x Integral (from t = 0 to 8) of exp[ -0.05t ]
8 5.0% 6.6%
9 7.2% = 50 x exp [ 0.05 x 8 ] x (1 - exp[ -0.05 x 8] )/0.05
10 8.0%
11 8.8% 9.8% = 50 x 1.491825 x 6.593599
12 9.8%
13 10.8% = 491.8247
14 11.8%
15 13.0% Total force of interest from t = 8 to t = 15
= Integral (from t = 8 to 15) of delta(t)
= 0.661733
So accumulated value at t = 15
= accumulated amount at t = 8 rolled up to t = 15
= 491.8247 * exp(total force of interest from t = 8 to t = 15)
= 491.8247 * exp(0.661733)
= 953.2292
TWRR factor over two years = product of growth factors = 137 / 120 * 173 / 157 * 205 / 221 = 1.166937
ie (1 + TWRR )^2 = 1.166937
so TWRR = 1.166937 ^0.5 - 1 = 8.025%
Time 0 1 2 Price
Amount 0 4.15 104.15 100 2-yr par yield = 4.15 means a bond paying 4.15% annual coupon would be priced at £100%
Amount 0 8 106 105.4 8% stock is redeemed at 98, so it pays 98 + 8 at time 2 ie 106
120
60
(A) 4.15v(1) + 104.15v(2) = 100 (par-yield)
40
(B) 8 v(1) + 106 v(2) = 105.4 (8% coupon stock)
20
Substituting into (A) => v(1) = ( 100 - 104.15 x 0.92191711 ) / 4.15 = 0.959598
v(2) = 0.921917 => one year spot rate = v(2)^-0.5 - 1 = 4.1488% v.close to 4.15%
OK cf guess
2 10 15 25
(i) Discounted value of assets = 7.4v(2) + 31.834v(25) = 7.4 x 1.07^-2 + 31.834 x 1.07^-25 = 12.329 m
Discounted value of liabilities = 10v(10) + 20v(15) = 10 x 1.07^-10 + 20 x 1.07^-15 = 12.332 m, so PV(assets) = PV(liabilities)
(to 4 significant figures)
Discounted mean term of assets = Average term weighted by value
= 2 x 7.4v(2)/12.33 + 25 x 31.834v(25)/12.33
= 1/12.33 x ( 2 x 7.4 x 1.07^-2 + 25 x 31.834 x 1.07^-25 ) = 12.94
PV(assets) = PV(liabilities) AND duration(assets) = duration(liabilities) => 1st 2 conditions for immunisation hold.
Discounted value of liabilities = 10v(10) + 20v(15) = 10 x 1.075^-10 + 20 x 1.075^-15 = 11.611 m, so PV(assets) > PV(liabilities)
(iii) Assets are "spread out" over a longer time than liabilities - so they have greater convexity => ( along with other conditions in (i) )
=> ( along with other conditions in (i) ) immunised against rate changes
=> rate change would cause a profit
(ii) I assume 20p dividend means a quarterly dividend ie annual dividend yield approx 4 x 20p = 80p => dividend yield approx 80/450 = 18%
dividend yield >> risk-free rate => future price < market price (otherwise you could get a risk-free 18% yield)
Rough Guess
Dividend increases roughly equal risk free rate, so, ignoring interest and increases, dividends make up about 20p x 3 years x 4 quarters = 240p of price
So forward price has present value of about 450 - 240 = 210p and forward price is about 210 * 1.05^3 = 240p
PV (price) = PV (receipts)
ie 450 = 20 a8 @ j% + 20 x 1.01^8 * exp-(5% * 2) a4 @ k% + ForwardPrice exp-(5% * 3)
(ii)b I assume the net effective yield means the nominal after-tax yield (ie no attempt to turn into a "real" yield)
Equation of value is
Price = PV after-tax coupon payments + PV after-tax redemption payment
ie 94 = (from table in part i) (1 - 25% income tax) x ( 1.53v^0.5 + 1.605v + 1.665v^1.5 + 1.895v^2) + (113 - 1.48922 CGT)v^2
Initial guess for i: after-tax coupon rate is 3% x 75% = 2.25%. Capital gain is about 19% (after tax), ie about 9% pa, so try 2.25 + 9 = 11%pa as first guess
Interpolate
94.77785
By similar triangles, x% - 11% = 12% - 11%
94 94.7785 - 94 94.7785 - 93.121743
11% x% 12%
11.47% (1 - 25% ) x ( 1.53 x 1.1147^-0.5 + 1.605x1.1147^-1 + 1.665x1.1147^-1.5 + 1.895x1.1147^-2) + (113 - 1.48922)x1.1147^-2 = 93.9939552
v.close to 94
so net yield pa is 11.47%
Exact calc
Coupon payments are made on 1 July and 1 Jan, ie at times 0.5, 1, 1.5, 2, …, 24.5, 25
Tax on coupons is paid on 1 April ie at time 1.25, 2.25, 3.25, …, 25.25
Redemption payment is made at time 25
Capital gains tax is paid at time 25.25
Equation of value is
Price = PV coupons - PV income tax + PV redemption - PV CGT
25
ie 99 = 8 a(2)25¬ - v0.25 x 25% x 8 a25¬ + 110 x v - 30% x (110 - 99) x v25.25 where v = 1/(1+i)
(ii) If tax is collected on 1 June, all tax will be paid later, so after tax yield will rise.
(Mathematically, present value of tax payments falls, whereas PV of receipts unchanged.
So to keep present value of whole investment the same (94), must use higher yield.)
(Financially: it's preferable to pay later rather than sooner as you can get more interest on whatever you were going to pay the tax with.)
"More preferable" => higher yield.
= 14000 x 8.70201658542704
= 119020.103 too little, so the payment at t = 13.5 is necessary to get back into credit.
(ii) Guess
Discounted payback period is 13.5 years, so the rest (approx 11 years) is profit.
So accumulated profit is about 11 x 14000 x 1.05^6 (about half remaining term) = 210k
Exact calc.
Loan is paid off at t=13.5, when the investor has asset with present value of 121828 - 120000 = 1828.232
Investor can save this at 5%, plus the rest of the annuity payments.
(25 - 13.5)
So rolled up profit = 4557.34967 x 1.05 + 14000 s(2)(25 - 13.5)¬ @ 5%
= £221,310
If X ~ LogN(μ,σ2)
2
then from tables E(X) = exp( μ+ 1/2 σ ) , and
Var(X) = [ exp( 2μ+ σ2) ] [ exp(σ2)-1 ]
2
Substitute σ into formula for E(X)
= Probability that log X + log (1 + i1) + log (1 + i2) + … + log (1 + i5) > log(5000)
So probability that log X + log (1 + i1) + log (1 + i2) + … + log (1 + i5) > log(5000)
0.5
= probability that N( 0,1 ) > ( log(5000) - logX - 0.1503 ) / ( 0.09161 )
Check variance of 2% pa => variance of about 10% over 5 years, or standard deviation of 0.1^0.5 = 30%
To have 99% chance of meeting liability, you must have margin of at least 2 standard deviations (about 2 x 30% = 60%) - OK
(ii) She has to have a large margin of over 70% (8699 / 5000 - 1) to have a 99% chance of meeting her liability in 5 years time.
(If the liability were payable, in, say, 10 years, she would need even more to be 99% certain of paying it.)
which you can work out using annuities with adjusted interest rates, or using geometric formula, or just directly:
given v = 1.06^-1 = 0.9433962
Amount paid was £1000, so capital repayment was the non-interest part of payment = 1000 - 880.27 = £119.73
(iii) First calculate amount outstanding after 6th payment and then do similar process to part (ii)
Amount outstanding after 6th payment (in March 2001) is present value of remaining 9 payments as at March 2001
PV (July payments: 3 payments in 01, 02, 03) = 1000 * v^(4/12) * ( 1.05^6 + 1.05^9 v + 1.05^12 v^2 )
PV (November payments: 3 in 01, 02, 03) = 1000 * 1.05 * v^(8/12) * (1.05^6 + 1.05^9 v + 1.05^12 v^2 )
PV (March payments: 3 in 02, 03, 04) = 1000 * 1.05^2 * v * (1.05^6 + 1.05^9 v^ + 1.05^12 v^2 )
Amount paid was £1000 x 1.05^6 = 1340.10, so capital repayment was the non-interest part of payment
= 1340.10 -198.55 = £1,078.43