Project #32664 - Corporate Finance

Task Name: Phase 3 Individual Project
Deliverable Length: Word document of 700–1,000 words with attached Excel spreadsheet showing calculations
Details:

Weekly tasks or assignments (Individual or Group Projects) will be due by Monday, and late submissions will be assigned a late penalty in accordance with the late penalty policy found in the syllabus. NOTE: All submission posting times are based on midnight Central Time.

After engaging in the dialogue about the concept of risk and return with your colleagues, you will now be given an opportunity to apply the principles that were presented in this Phase. Using current market data and the capital asset pricing model, determine the required return of the following assets based on the betas provided below. Your mentor suggests using the 5-year U.S. government bond yield as your risk-free rate and the 5-year market return that you calculated in Phase 1.

  • Asset A, Beta = 0.5
  • Asset B, Beta = 1.0
  • Asset C, Beta = 2.0

 

Asset

5-year Risk-Free Rate of Return

Beta (β) (Given)

5-Year Return on Top 500 Stocks

Required Return on Investment

Asset 'A'

 

0.50

 

 

Asset 'B'

 

1.00

 

 

Asset 'C'

 

2.00

 

 

 

After completing your calculations, summarize your observations with regard to the relationship between risk and return based on the results of this experiment.

For Part 2 of this task, you will need to select 3 mutual funds with different betas and use the capital asset pricing model to approximate the 5-year minimum required return for each of these funds based on their individual betas. After you calculate the 5-year required return, you can now compare it to the actual 5-year returns of these funds and determine whether they are over- or underperforming.

 

Symbol of Mutual Fund

5-year Risk-Free Rate of Return

 Mutual Fund Betas (β)

5-Year Return on Top 500 Stocks

Required Return on Investment

Actual Return

Performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In your writeup associated with this activity, be sure to present and explain your results as they relate to risk and return, and explain the following:

  • Why mutual fund investing is generally considered less risky than purchasing individual assets?
  • How are the CAPM and the SML related and can be used to identify over- and underperforming investments?
  • How do inflationary expectations and the markets' perception of risk affect the slope and origin of the SML?

Note: You can find information about the top 500 stocks at this Web site.

Reference

S&P 500 index chart. (2014). Retrieved from the Yahoo! Finance Web site: http://finance.yahoo.com/echarts?s=%5egspc+interactive#symbol=^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

Be sure to document your paper with in-text citations, credible sources, and a list of references used in proper APA format.

Please submit your assignment.

Click on Student Expectations to view the expectations for this assignment.

Assignment Grading Rubric

For assistance with your assignment, please use your text, Web resources, and all course materials.

Course Materials

 Course Materials

Points Possible: 150
Date Due: Monday, Jun 09, 2014
Objective:
  • Demonstrate an understanding of the time value of money
  • Demonstrate the ability to perform interest rate calculations for single and multiple time period cash flows.
Submitted Files: Submit Task
Score: N/A
Instructor Comments: No comments have been made
FINC390-1402B-01 Introduction to Corporate Finance
Task Name: Phase 4 Individual Project
Deliverable Length: Word document of 700–1,000 words with attached Excel spreadsheet showing calculations
Details:

Weekly tasks or assignments (Individual or Group Projects) will be due by Monday, and late submissions will be assigned a late penalty in accordance with the late penalty policy found in the syllabus. NOTE: All submission posting times are based on midnight Central Time.

Key Assignment Draft

After engaging in a dialogue with your colleagues on valuation, you will now be given an opportunity to apply principles that were presented in this Phase. Using a Web site that provides current bond pricing and yield information, you will complete and analyze the tables illustrated below. Your mentor suggests using a Web site similar to this one.

To fill out the first table, you will need to select 3 bonds with maturities between 10 and 20 years with bond ratings of "A to AAA," "B to BBB" and "C to CC." All of these bonds will have these values (future values) of $1,000. You will need to use a coupon rate of the bond times the face value to calculate the annual coupon payment. You should subtract the maturity date from the current year to determine the time to maturity. The Web site should provide you with the yield to maturity and the current quote for the bond. (Be sure to multiply the bond quote by 10 to get the current market value.) You will then need to indicate whether the bond is currently trading at a discount, premium, or par.

 

Bond

Company/
Rating

Face Value (FV)

Coupon Rate

Annual Payment (PMT)

Time-to Maturity (NPER)

Yield-to-Maturity (RATE)

Market Value (Quote)

Discount, Premium, Par

'A'-Rated

 

 $     1,000

 

 

 

 

 

 

'B'-Rated

 

 $     1,000

 

 

 

 

 

 

'C'-Rated

 

 $     1,000

 

 

 

 

 

 

 

To complete the second table, you can use most of the data you included in your first table, except now you will add 1% to the yield to maturity and recalculate the market value (present value) of the bond and indicate whether it would trade at a discount, premium, or par.

 

Bond

Company/ Rating

Face Value (FV)

Coupon Rate

Annual Payment (PMT)

Time-to Maturity (NPER)

Yield-to-Maturity increased by 1% (RATE)

Market Value (PV)

Discount, Premium, Par

'A'-Rated

 

 $     1,000

 

 

 

 

 

 

'B'-Rated

 

 $     1,000

 

 

 

 

 

 

'C'-Rated

 

 $     1,000

 

 

 

 

 

 

 

In the third table, you will follow the same steps as in the second table, except you will now subtract 1% from the yield to maturity, recalculate the market value (present value) of the bond, and indicate whether it would be trading at a discount, premium, or par.

 

Bond

Company/ Rating

Face Value (FV)

Coupon Rate

Annual Payment (PMT)

Time-to Maturity (NPER)

Yield-to-Maturity decreased by 1% (RATE)

Market Value (PV)

Discount, Premium, Par

'A'-Rated

 

 $     1,000

 

 

 

 

 

 

'B'-Rated

 

 $     1,000

 

 

 

 

 

 

'C'-Rated

 

 $     1,000

 

 

 

 

 

 

 

After completing the three tables, explain your findings and why your calculations coincide with the principles related to bonds that were presented in the Phase. Be sure to address the following:

  • Explain the relationship observed between ratings and yield to maturity.
  • Explain the relationship observed as yield to maturity (required rate of return) increased by 1%.
  • Explain the relationship observed as the yield to maturity (required rate of return) decreased by 1%.
  • Explain why it should have been predictable based on a coupon rate and the yield to maturity why the bonds would trade at a discount, premium, or par.
  • Based on the material you learn in this Phase, what would you expect to happen to the yield to maturity and market value of the bonds if the time to maturity was increased or decreased by 5 years?

Be sure to document your paper with in-text citations, credible sources and a list of references used in proper APA format.

Reference

Bond finance. (n.d.). Retrieved from the Yahoo! Finance Web site: http://screener.finance.yahoo.com/bonds.html

Please submit your assignment.

Click on Student Expectations to view the expectations for this assignment.

Assignment Grading Rubric

For assistance with your assignment, please use your text, Web resources, and all course materials.

Course Materials

 Course Materials

Points Possible: 150
Date Due: Monday, Jun 16, 2014
Objective:
  • Demonstrate an understanding of the time value of money
  • Demonstrate the ability to perform interest rate calculations for single and multiple time period cash flows.
  • Demonstrate the ability to calculate the future value and present value of annuities.
  • Demonstrate the ability to value plain vanilla bonds.
Submitted Files: Submit Task
Score: N/A
Instructor Comments: No comments have been made

Subject Business
Due By (Pacific Time) 06/09/2014 12:00 am
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