Currently, the term structure is as follows: One-year bonds yield 12.00%, two-year bonds yield 13.00%, three-year bonds and greater maturity bonds all yield 14.00%. You are choosing between one-, two-, and three-year maturity bonds all paying annual coupons of 13.00%, once a year. You strongly believe that at year-end the yield curve will be flat at 14.00%.

a. Calculate the one year total rate of return for the three bonds. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. Which bond you would buy?

• Use Excel to conduct a regression of the values of the security against the predictors and verify the validity of underlying assumptions
  • Check for homoscedasticity and serial correlation
  • If necessary, rerun the regression using robust standard errors
  • Look for evidence of multicollinearity and eliminate redundant predictors if necessary

Record the preset value factor at 10% for each year and compute the preset value cost of owning and the preset value of leasing. Which alternative is more desirable at this rate? do you think your answer would change if the interest rate was 6% instead of 10%

Record the preset value factor at 10% for each year and compute the preset value cost of owning and the preset value of leasing. Which alternative is more desirable at this rate? do you think your answer would change if the interest rate was 6% instead of 10%

6. What discount rate results in the maximum NPV for this project? What is that maximum NPV? Write a note to your client (or an old-school boss), who has little knowledge about the “Solver”, explaining what parameters you chose as inputs in the solver and what you asked the solver to do. Be sure to refer to the cell ID (e.g. cell D52) where appropriate so your client/boss can follow what you are talking about.

(A) What type of pattern exists in the data?
a. Positive trend, no seasonality
b. Horizontal trend, no seasonality
c. Vertical trend, no seasonality
d. Positive tend, with seasonality
e. Horizontal trend, with seasonality
f. Vertical trend, with seasonality

(B) Use a multiple regression model with dummy variables as follows to develop an equation to account for seasonal effects in the data. Qtr1 = 1 if Quarter 1, 0 otherwise; Qtr2 = 1 if Quarter 2, 0 otherwise; Qtr3 = 1 if Quarter 3, 0 otherwise. If required, round your answers to three decimal places. For subtractive or negative numbers use a minus sign even if there is a + sign before the blank. (Example: -300) If the constant is "1" it must be entered in the box. Do not round intermediate calculation.

(C)

(D)Use a multiple regression model to develop an equation to account for trend and seasonal effects in the data. Use the dummy variables you developed in part (b) to capture seasonal effects and create a variable t such that t = 1 for Quarter 1 in Year 1, t = 2 for Quarter 2 in Year 1,… t = 12 for Quarter 4 in Year 3. If required, round your answers to three decimal places. For subtractive or negative numbers use a minus sign even if there is a + sign before the blank. (Example: -300)

(E) Compute the quarterly forecasts for next year based on the model you developed in part (d).
Do not round your interim computations and round your final answer to three decimal places.

(F) Is the model you developed in part (b) or the model you developed in part (d) more effective? If required, round your intermediate calculations and final answer to three decimal places.

2. Using Excel, plot a graph that demonstrates the relationship between the discount rate and the NPV

   of the project. Be sure to label the graph where appropriate so that it is self-explanatory to your client. Hint: In the spreadsheet, you will need to first construct a table that contains the NPV of the project with varies of discount rate, and then use that table to construct a plot.

3. Basedonthegraphyouplotinquestion4, comment on what valuable information can you derive from the graph, and how you could use this graph to make an investment decision for the firm?

Ch.8 #5

Consider the following time series data.

1)  Use a multiple regression model with dummy variables as follows to develop an equation to account for seasonal effects in the data. Qtr1 = 1 if Quarter 1, 0 otherwise; Qtr2 = 1 if Quarter 2, 0 otherwise; Qtr3 = 1 if Quarter 3, 0 otherwise.

If required, round your answers to three decimal places. For subtractive or negative numbers use a minus sign even if there is a + sign before the blank. (Example: -300) If the constant is "1" it must be entered in the box. Do not round intermediate calculation.

Value = ________ + __________ Qtr1 + ___________ Qtr2 + ___________ Qtr3

2) Compute the quarterly forecasts for next year based on the model you developed in part (b). If required, round your answers to three decimal places. Do not round intermediate calculation.

Quarter 1 forecast _____________

Quarter 2 forecast_____________

Quarter 3 forecast_____________

Quarter 4 forecast_____________

3) Use a multiple regression model to develop an equation to account for trend and seasonal effects in the data. Use the dummy variables you developed in part (b) to capture seasonal effects and create a variable t such that t = 1 for Quarter 1 in Year 1, t = 2 for Quarter 2 in Year 1,… t = 12 for Quarter 4 in Year 3.

If required, round your answers to three decimal places. For subtractive or negative numbers use a minus sign even if there is a + sign before the blank. (Example: -300)

Value = __________ + __________ Qtr1 + __________ Qtr2 + ___________ Qtr3 + ________ t

4) Compute the quarterly forecasts for next year based on the model you developed in part (d).

Quarter 1 forecast _____________

Quarter 2 forecast_____________

Quarter 3 forecast_____________

Quarter 4 forecast_____________

5) Is the model you developed in part (b) or the model you developed in part (d) more effective?

Justify your answer.

Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:

₁R₁ = 3.26%, E(₂r₁) = 4.70%, E(₃r₁) = 5.20%, E(₄r₁) = 6.70%

Using the unbiased expectations theory, calculate the current (long-term) rates for 1-, 2-, 3-, and 4-year-maturity Treasury securities. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

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