Hint: From Investopedia!



Some practice questions for our quiz on 3/12/21 – KEYS FOLLOW!DATEi on 1 year GSi on 2 year GSi on 3 year GS12/31/15.65%1.06%1.31%2/8/16.51%.66%.83%3/11/16.70%.97%1.16%Suppose that you were bullish on bonds and bought one 3 year GS with a coupon rate of 2%. on 12/31/2015 (data is in Table above). The face value of the bond is $1,000 as is normal. Suppose that you held the bond until 2/8/16 (a little over a month). Calculate the price of bond on 12/31/15 and then on 2/8/16. Calculate your profit / loss AND rate of return. (you did not receive any coupon payments during this short holding period) Please show all work. Your friend was also bullish on bonds but played the 2 year GS market instead. Same as above, your friend bought one 2 year GS on 12/31/15 and closed on 2/8/16. The coupon rate is the same as above = 2%, face value = $1,000 and you can ignore any coupon payments given the short holding period. Calculate the price of bond on 12/31/15 and then on 2/8/16. Calculate your profit / loss AND rate of return.The graphic below is from stock trak and shows the numbers for a 2 year treasury bond - face value = $1000 and the coupon rate is 3.375 %. The current interest rate on a 2 year T-note is 1.6%. Calculate the price of this bond and show that it is close to the price quote in stock trak . Suppose that you purchased a 3 year government security (face value = $1000) where the interest rate was 1.31% with the coupon rate = 3%. You held on to the security for one year and sold it, a two year bond now, when the interest rate was .83% Calculate your profit or loss and rate of return. Calculate the price of a 2 year government security with face value of $1000 where the interest rate is 4% and the coupon payment is also 4%. Suppose that you were bearish on bonds during this 1994 soft landing event and you sold one 3 year GS with a coupon rate of 4% on 11/15/1994 when the yield is 7.41% as above. The face value of the bond is $1,000 as is normal. Suppose that you held the bond until 12/07/1994 when the yield is 7.62% and closed your position. Calculate the price of bond on 11/15/1994 and then on 12/07/1994. Calculate your profit / loss. (you did not receive any coupon payments during this short holding period) Please show all work. Your friend was also bearish on bonds but played the 2 year GS market instead. Same as above, your friend sold one 2 year GS on 11/15/1994 (yield = 7.10%) and closed on 12/07/1994 (yield = 7.48%). The coupon rate is the same as above = 4%, face value = $1,000 and you can ignore any coupon payments given the short holding period. Calculate the price of bond on 11/15/1994 and then on 12/07/1994. Calculate your profit / loss.4) (55 points) In class we went over exactly what 022860000happened in the movie 'Trading Places.' Dan Aykroyd (DA) and Eddie Murphy (EM) got a hold of the actual orange crop report, altered it, and gave it back to the 'two old guys' - the Duke brothers. Given the altered crop report, the Duke brothers thought that the freeze destroyed a portion of the orange crop and thus, believed that the price of orange juice would skyrocket given the bad orange crop (low supply!). Dan Aykroyd and Eddie Murphy knew the true report which indicated that the orange crop was just fine, the cold weather had a negligible (small if any) effect on the orange crop.For this question we are going to reverse the story - the true report is that the freeze has a significant impact on the orange crop so that when the announcement is made, orange juice futures are going to rise (low supply). Dan Aykroyd (DA) and Eddie Murphy (EM) get a hold of this true report and alter it, changing it to report that the orange crop is a bumper crop (freeze had no effect on crop) - a great growing season so that the Duke brothers (the old guys) enter the market at open by selling OJ futures, betting that prices will fall once the bumper crop is announced (sell high, buy low). Of course, they get tricked again. Orange juice futures contracts are for 15,000 pounds of orange juice and are priced in cents per pound (i.e. 150 = $1.50 per pound) The margin requirement in Stock Trak is $1,100 per contract. In what follows we will re-create this 'new' scene using the graphic below. a) (5 points) DA and EM open up their position after the Duke brothers drive the price down by buying 30 OJ futures at 140 (see point B). What is their leverage ratio when they opened up their position?b) (5 points) When DA and EM close by selling 30 futures at 170, how much money did they make or lose?c) (5 points) What is their rate of return ? Use whichever method you prefer. Now let's add a little twist to the story. One of the Duke brothers isn't sure about the validity of the orange crop report that they received and thus is concerned that if the orange crop has been negatively effected by the freeze, they can lose a lot of money. So he seeks out someone that knows his or her finance and that person is you.....they need to hedge their short position! So you instruct them to take their short position at open by selling 30 OJ futures when the price is 155 (point A on graphic). You then tell them to hedge by buying 30 futures options calls on OJ with a strike price of 140. Each call represents one futures contract and costs $1,500 per call. We now compare two scenarios:d) (5 points) Scenario #1: Assume no hedge and that the Duke brothers sell 30 Futures contracts at open where the price was 155 (point A) and closed at 170 (see point C). How much money did they make or lose?e) (10 points) Scenario #2: Assume the hedge as above. The Duke brothers sold 30 futures contracts at open where the price was 155 and also bought 30 FO call options with a strike price of 140 for $1,500 per call. Both positions are closed at expiration when futures price of OJ is 170. Given both bets, how much money did they make or lose? What is each call worth at expiration, if anything?f) (5 points) Suppose that the Duke brother that sought you out for your financial advice agreed to give you a check for 10% of the money that you saved them with the hedge, but only if the hedge worked. So compare the difference between your answers for Scenario #1 (no hedge) and Scenario #2 (with hedge). How much is the check for!We discussed TIPS (Treasury Inflation Protected Securities). Suppose you bought one Treasury Inflation Protected Security with a face value of $1000 and a coupon rate of 4%. During the first year, the inflation rate was 3% and during the second year, the inflation rate was 2.5%. What is your coupon payment in year 3?Hint: From Investopedia! Treasury Inflation-Protected Securities (TIPS)Excerpt:Suppose an investor owns $1,000 in TIPS at the end of the year, with a coupon rate of 1%. If there is no inflation as measured by the CPI, the investor will receive $10 in coupon payments for that year. If inflation rises by 2%, however, the $1,000 principal will be adjusted upward by 2% to $1,020. The coupon rate will remain the same at 1%, but it will be multiplied by the adjusted principal amount of $1,020 to arrive at an interest payment of $10.20 for the year.Consider the graphic below:What is the breakeven inflation rate on Friday, May 23, 2014?Use the info from stock trak to answer the following questions:For the first row, what is my profit or loss on my oil bet ? – recall, multiplier for oil is 1000 bblsFor the second row, what is my profit or loss on Treasury bet? – recall, I took a short position by selling 5 futures contracts – the multiplier is 1000For the third row, what is my profit or loss on my Dow futures bet? – recall, I took a long position by buying 6 futures contracts – the multiplier is 5Some practice questions for our quiz on 3/12/21 – KEYS FOLLOW!DATEi on 1 year GSi on 2 year GSi on 3 year GS12/31/15.65%1.06%1.31%2/8/16.51%.66%.83%3/11/16.70%.97%1.16%Suppose that you were bullish on bonds and bought one 3 year GS with a coupon rate of 2%. on 12/31/2015 (data is in Table above). The face value of the bond is $1,000 as is normal. Suppose that you held the bond until 2/8/16 (a little over a month). Calculate the price of bond on 12/31/15 and then on 2/8/16. Calculate your profit / loss AND rate of return. (you did not receive any coupon payments during this short holding period) Please show all work. CPDFPVCPDFPV201.013119.74139201.008319.83537201.02637219.48612201.01666919.67209201.03981719.23415201.02510719.5101510001.039817961.707610001.025107975.50771020.1691034.525YOU MADE A CAPITAL GAIN: 1034.525 - 1020.169 = 14.356Rate of return: 14.356/1020.169 = 1.41%Your friend was also bullish on bonds but played the 2 year GS market instead. Same as above, your friend bought one 2 year GS on 12/31/15 and closed on 2/8/16. The coupon rate is the same as above = 2%, face value = $1,000 and you can ignore any coupon payments given the short holding period. Calculate the price of bond on 12/31/15 and then on 2/8/16. Calculate your profit / loss AND rate of return.CPDFPVCPDFPV201.010619.79022201.006619.86887201.02131219.58265201.01324419.7385910001.021312979.132410001.013244986.92951018.5051026.537YOU MADE A CAPITAL GAIN: 1026.537 - 1018.505 = 8.032Rate of return: 8.032/1018.505 = .79%The graphic below is from stock trak and shows the numbers for a 2 year treasury bond - face value = $1000 and the coupon rate is 3.375 %. The current interest rate on a 2 year T-note is 1.6%. Calculate the price of this bond and show that it is close to the price quote in stock trak . CPDFPV33.751.01633.218533.751.03225632.6953810001.032256968.75191034.666Suppose that you purchased a 3 year government security (face value = $1000) where the interest rate was 1.31% with the coupon rate = 3%. You held on to the security for one year and sold it, a two year bond now, when the interest rate was .83% Calculate your profit or loss and rate of return. CPDFPVCPDFPV301.013129.61208301.008329.75305301.02637229.22918301.01666929.50813301.03981728.8512310001.016669983.604410001.039817961.70761042.8661049.4TR = 1042.866 + 30 = 1072.866(1072.866 - 1049.4) = 23.466 / 1049.4 = 2.24%Calculate the price of a 2 year government security with face value of $1000 where the interest rate is 4% and the coupon payment is also 4%. CPDFPV401.0438.46154401.081636.9822510001.0816924.55621000Suppose that you were bearish on bonds during this 1994 soft landing event and you sold one 3 year GS with a coupon rate of 4% on 11/15/1994 when the yield is 7.41% as above. The face value of the bond is $1,000 as is normal. Suppose that you held the bond until 12/07/1994 when the yield is 7.62% and closed your position. Calculate the price of bond on 11/15/1994 and then on 12/07/1994. Calculate your profit / loss. (you did not receive any coupon payments during this short holding period) Please show all work. 401.074137.24048?401.076237.16781401.15369134.67133401.15820634.53616401.23917932.27943401.24646232.0908410001.239179806.985710001.246462802.2709911.177906.0657Profit = 5.1113Your friend was also bearish on bonds but played the 2 year GS market instead. Same as above, your friend sold one 2 year GS on 11/15/1994 (yield = 7.10%) and closed on 12/07/1994 (yield = 7.48%). The coupon rate is the same as above = 4%, face value = $1,000 and you can ignore any coupon payments given the short holding period. Calculate the price of bond on 11/15/1994 and then on 12/07/1994. Calculate your profit / loss.401.07137.34827e)401.074837.21623401.14704134.87234401.15519534.6261910001.147041871.808410001.155195865.6547944.029937.4971PROFIT = $6.5319 4) (55 points) In class we went over exactly what 022860000happened in the movie 'Trading Places.' Dan Aykroyd (DA) and Eddie Murphy (EM) got a hold of the actual orange crop report, altered it, and gave it back to the 'two old guys' - the Duke brothers. Given the altered crop report, the Duke brothers thought that the freeze destroyed a portion of the orange crop and thus, believed that the price of orange juice would skyrocket given the bad orange crop (low supply!). Dan Aykroyd and Eddie Murphy knew the true report which indicated that the orange crop was just fine, the cold weather had a negligible (small if any) effect on the orange crop.For this question we are going to reverse the story - the true report is that the freeze has a significant impact on the orange crop so that when the announcement is made, orange juice futures are going to rise (low supply). Dan Aykroyd (DA) and Eddie Murphy (EM) get a hold of this true report and alter it, changing it to report that the orange crop is a bumper crop (freeze had no effect on crop) - a great growing season so that the Duke brothers (the old guys) enter the market at open by selling OJ futures, betting that prices will fall once the bumper crop is announced (sell high, buy low). Of course, they get tricked again. Orange juice futures contracts are for 15,000 pounds of orange juice and are priced in cents per pound (i.e. 150 = $1.50 per pound) The margin requirement in Stock Trak is $1,100 per contract. In what follows we will re-create this 'new' scene using the graphic below. a) (5 points) DA and EM open up their position after the Duke brothers drive the price down by buying 30 OJ futures at 140 (see point B). What is their leverage ratio when they opened up their position?30 X 15,000 X 1.40 = 630,000/33,000 = 19.09OR15,000 X 1.40 = 21,000/1,100 = 19.09b) (5 points) When DA and EM close by selling 30 futures at 170, how much money did they make or lose?30 X 15,000 X (1.70 - 1.40) = $ 135,000 = PROFITc) (5 points) What is their rate of return ? Use whichever method you prefer. $135,000/$33,000 = 409%OR%Δ OJ = (170-140)/140 = 21.42857% X 19.09 = 409%Now let's add a little twist to the story. One of the Duke brothers isn't sure about the validity of the orange crop report that they received and thus is concerned that if the orange crop has been negatively effected by the freeze, they can lose a lot of money. So he seeks out someone that knows his or her finance and that person is you.....they need to hedge their short position! So you instruct them to take their short position at open by selling 30 OJ futures when the price is 155 (point A on graphic). You then tell them to hedge by buying 30 futures options calls on OJ with a strike price of 140. Each call represents one futures contract and costs $1,500 per call. We now compare two scenarios:d) (5 points) Scenario #1: Assume no hedge and that the Duke brothers sell 30 Futures contracts at open where the price was 155 (point A) and closed at 170 (see point C). How much money did they make or lose?30 x 15,000 x (1.55 - 1.70) = - 67,500 (loss)e) (10 points) Scenario #2: Assume the hedge as above. The Duke brothers sold 30 futures contracts at open where the price was 155 and also bought 30 FO call options with a strike price of 140 for $1,500 per call. Both positions are closed at expiration when futures price of OJ is 170. Given both bets, how much money did they make or lose? What is each call worth at expiration, if anything?lose 67,500 as abovehedge: exercise calls: 30 x 15,000 x (1.70 - 1.40) = 135,000 - 45,000 (cost of calls) = 90,000 = profitprofit = 90,000 - 67,500 = 22,500calls are worth $4,500 each at expiration (30 cents in money x 15,000 = $4,500)f) (5 points) Suppose that the Duke brother that sought you out for your financial advice agreed to give you a check for 10% of the money that you saved them with the hedge, but only if the hedge worked. So compare the difference between your answers for Scenario #1 (no hedge) and Scenario #2 (with hedge). How much is the check for!difference is $90,000 x .10 = $9,000We discussed TIPS (Treasury Inflation Protected Securities). Suppose you bought one Treasury Inflation Protected Security with a face value of $1000 and a coupon rate of 4%. During the first year, the inflation rate was 3% and during the second year, the inflation rate was 2.5%. What is your coupon payment in year 3?Hint: From Investopedia! Treasury Inflation-Protected Securities (TIPS)Excerpt:Suppose an investor owns $1,000 in TIPS at the end of the year, with a coupon rate of 1%. If there is no inflation as measured by the CPI, the investor will receive $10 in coupon payments for that year. If inflation rises by 2%, however, the $1,000 principal will be adjusted upward by 2% to $1,020. The coupon rate will remain the same at 1%, but it will be multiplied by the adjusted principal amount of $1,020 to arrive at an interest payment of $10.20 for the year.The principal will rise to $1030 after year 1 and then to (1 + .025) * $1030 after year 2 = $1055.75.04 x $1055.75 = $ 42.23 = coupon payment in year 3. Consider the graphic below:What is the breakeven inflation rate on Friday, May 23, 2014?The breakeven inflation rate is 2.54% - .32% = 2.22%We know that the real rate on the TIP is .32%......if inflation is 2.22%, then the real yield on the “normal GS” is 2.54% - 2.22% = .32% so you are indifferent between the two bonds – that is what is meant by the “breakeven inflation rate!”Use the info from stock trak to answer the following questions:For the first row, what is my profit or loss on my oil bet ? – recall, multiplier for oil is 1000 bblsFor the second row, what is my profit or loss on Treasury bet? – recall, I took a short position by selling 5 futures contracts – the multiplier is 1000For the third row, what is my profit or loss on my Dow futures bet? – recall, I took a long position by buying 6 futures contracts – the multiplier is 5For oil: 1000 (65.68 – 62.04) = 3,640For bond bet: 5 x 1000 (131.89 – 132.48) = 2,950For Dow bet: 6 x 5 (32,414 – 31,442) = 29,160 ................
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