Can you help me with my Finance Questions, particularly show me how to do Question 1A. 1C, 2A, 2C, 3, 4, 5A. 5C. I have included a word document to help explain the questions
PICK FOUR GOVERNMENT OF CANADA BONDS FROM THE GLOBE AND MAIL (26 Jan 2009 11:11 EST)
? PICK TWO BOND WITH IDENTICAL COUPONS BUT DIFFERENT MATURITY DATES
Series Coupon Rate
A CANADA FEDGOV 4.00 S 2017/06/01 110.06 2.65 M 7.10 CAN
B CANADA FEDGOV 4.00 S 2016/06/01 110.29 2.46 M 6.37 CAN
? AND TWO BONDS WITH IDENTICAL MATURITIES BUT DIFFERENT COUPPON RATES
C CANADA FEDGOV 3.75 S 2012/06/01 106.80 1.65 M 3.14 CAN
D CANADA DEDGOV 5.25 S 2012/06/01 111.66 1.65 M 3.08 CAN
NOTE THE CURRENT PRICE, MATURITY, AND COUPON RATE OF EACH.
NOW SUPPOSE THAT THE YIELD TO MATURITY INCREASES BY ONE PERCENTAGE POINT FOR EACH BOND (E.G. FROM 4% TO 5%).
1. CALCULATE THE PRICE OF EACH BOND BASED ON THE YIELDS PROVIDED IN THE NEWSPAPER.
2. RECALCULATE THE PRICE OF EACH BOND USING THE INCREASED YIELDS.
3. ARE LONG MATURITY OR SHORT MATURITY BONDS MORE AFFECTED BY THE YIELD INCREASE?
4. ARE HIGH-COUPON OR LOW-COUPON BONDS MORE AFFECTED BY THE YIELD INCREASE?
5. CALCULATE THE DURATION FOR EACH OF THESE BOND.
3. ARE LONG MATURITY OR SHORT MATURITY BONDS MORE AFFECTED BY THE YIELD INCREASE
The longer the maturity of a debt instrument, the more risk involved. With more risk, an investor wants a higher yield for tying up capital. Because future projections become more and more uncertain as the time period increases, the yield would fluctuate. Think of it as a risk premium. It then follows that a longer period of time (long maturity bonds) will create more uncertainly. Yields will then fluctuate because of the unknowns, and also because of the fickle nature of the financial markets (which relates to the unknown future, as well).
During periods of economic expansion, investors worry about being locked into low rates; therefore, they want a higher yield than a short-term investor could demand. Increases in yield will point to a better economy in the future. Long term investors would be inclined to settle for lower yields only when ...
The solution explains the natures of financial markets in their perception of bond yields over long and short maturities. The second part of the 602 word explanation deals with yield changes on high or low coupon bonds (meaning if the stated rate is above or below market rates).
Characteristics That Affect Security Yield
Characteristics That Affect Security Yields
Identify the relevant characteristics of any security that can affect the security's yield.
Impact of Liquidity on Yield
What effect does a high credit risk have on securities?
Tax Effects on Yields
Do investors in high tax brackets or those in low tax brackets benefit more from tax-exempt securities? Why? Do municipal bonds or corporate bonds offer a higher before tax yield at a given point in time? Why? Which has the higher after tax yield? If taxes did not exist, would Treasury bonds offer a higher or lower yield than municipal bonds with the same maturity? Why?
Pure Expectations Theory
Explain how a yield curve would shift in response to a sudden expectation of rising interest rates, according to the pure expectations theory.
Liquidity Premium Theory
Explain the liquidity premium theory.
Segmented Markets Theory
If a downward-sloping yield curve is mainly attributed to segmented markets theory, what does that suggest about the demand for and supply of funds in the short-term and long-term maturity markets?
What factors influence the shape of the yield curve? Describe how financial market participants use the yield curve.
If liquidity and interest rate expectations are both important for explaining the shape of a yield curve, what does a flat yield curve indicate about the market's perception of future interest rates?
Global Interaction among Yield Curves
Assume that the yield curves in the United States, France, and Japan are flat. If the U.S. yield curve then suddenly becomes positively sloped, do you think the yield curves in France and Japan would be affected? If so, how?
You need to choose between investing in a one-year municipal bond with a 7 percent yield and a one-year corporate bond with an 11 percent yield. If your marginal federal income tax rate is 30 percent and no other differences exist between these two securities, which one would you invest in?
Briefly describe the origin of the Federal Reserve System. Describe the functions of the Fed district banks.
What are the main goals of the Federal Open Market Committee (FOMC)? How does it attempt to achieve these goals?
Open Market Operations
Explain how the Fed increases the money supply through open market operations.
Effect on Money Supply
Why do the Fed's open market operations have a different effect on the money supply than transactions between two depository institutions?