FINANCIAL MANAGEMENT

UNIVERSITY OF QUEBEC IN MONTREAL  

ASSIGNMENT 1I

PRESENTED

TO

IVAN STETSYUK

FINANCIAL MANAGEMENT

FIN 3500

GROUP 65

BY

DIANA DONCHENKO 

DAVID BOCAHUT

 PIERRE UHOB

 08 OF DECEMBER, 2015

Problem I

Given        Looking for:

Maturity: 5 years                                                       Dollar and % return over the next year for bond P and D?

Term: 5 years

Coupon bond P: 120$

Coupon bond D: 60$

Face value: 1000$

Coupon rate bond P: 12%

Coupon rate bond D: 6%

Frequency of the coupon: yearly

1. Total dollar return = income from investment + capital gain (loss) due to change in price

Income from investment – 12% coupon → 12% of 1000$ = 120$

Capital gain (loss) due to change in price - ?

Bond Value now: B’= 120 x  +  = 466,7664 + 649,93 = 1116,69$[pic 1][pic 2]

Bond Value next year: B”= 120 x  +  = 388,77 + 708,43 = 1097,20$[pic 3][pic 4]

Capital gain (loss) = B” – B’

Dollar return = 120 + (1097,20 – 1116,69) = 100,51$

Percentage return:        

Dividend yield =  = 0,1075 = 10,75%[pic 5]

Capital gains yield =  = -0,0175= -1,75%[pic 6]

Total percentage return = 10,75% - 1,75% = 9%

Income from investment – 6% coupon → 6% of 1000$ = 60$

Capital gain (loss) due to change in price - ?

Bond Value now: B’= 60 x  +  = 233,38 + 649,93 = 883,31$[pic 7][pic 8]

Bond Value next year: B”= 60 x  +  = 194,38 + 708,43 = 902,81$[pic 9][pic 10]

Capital gain (loss) = B” – B’

Dollar return = 60 + (902,81-883,31) = 79,50$

Percentage return:

Dividend yield =  = 0, 0679 = 6,79%[pic 11]

Capital gains yield =  = 0,0221= 2,21%[pic 12]

Total percentage return = 6,79% + 2,21% = 9%

1. Interrelationships among the YTM, coupon rate and total return.

As YTM is the same for the both bonds which is 9%, the total percentage return was the same. But because of the different coupon rate, these two bonds have different dollar return.  The bond P had a higher coupon rate than the bond D. Even if the bond P lost its capital value because it’s a premium bond, the dollar return was higher than the one of the bond D due to the coupon rate, what made all the difference.  

Problem II

First of all, we have to find the price of those stocks which lead us to calculate the dividend yield and then the capital gains yield.

W: P0= D0(1 +g) / (R-g) = 4.50(1.10)/ (.19 - .10) = $55.00

Dividend yield = D1/P0 = 4.50(1.10)/55.00 = 9%

Capital gains yield = .19 - .09 = 10%

X: P0= D0(1 +g) / (R-g) = 4.50/ (.19 - 0) = $23.68

Dividend yield = D1/P0= 4.50/23.68 = 19%

Capital gains yield = .19 - .19 = 0%

Y: P0= D0(1 +g) / (R-g) = 4.50(1 - .05)/ (.19 + .05) = $17.81

Dividend yield = D1/P0 = 4.50(0.95)/17.81 = 24%

Capital gains yield = .19 - .24 = 5%

Z: P2= D2(1 +g2) / (R-g2) = D0(1 +g1)2(1 +g2)/(R-g2) = 4.50(1.20)2(1.12)/ (.19 - .12) = $103.68

P0= 4.50 (1.20) / (1.19) + 4.50 (1.20)2/ (1.19)2+ 103.68 / (1.19)2 = $82.33

Dividend yield = D1/P0 = 4.50(1.20)/82.33 = 6.6%

Capital gains yield = .19 - .066 = 12.4%

1. The negative-growth stocks provide a high current income and high growth stocks have a lower income yield. Even if the required return is 19% for all stocks, we see that the return is distributed differently between current income and capital gains depending on the growth rate.

Problem III

1. Boom: E(Rp) = (0,4x0,24) + (0,4x0,36) + (0,2x0,55) = 0,35 = 35%

Normal : E(Rp) = ( 0,4x 0,17) + ( 0,4 x 0,13) + ( 0,2 x 0,09) = 0,1380 = 13,80%

Bust : E (Rp) = (0,4 x 0,00) + ( 0,4 x (-0,28)) + (0,2 x (-0,45)) = -0,2020 = -20,20%

Expected return of the portfolio is:

...