Asset Valuation Online Open Book Exam

Question 1

  1. Describe and critically analyse the risks an investor may experience in managing a portfolio of corporate bonds. (5 marks)
  2. Critically analyse the use of Duration as a measure of interest rate risk for a bond. (5 marks)
  3. An investor is considering purchasing a 5-year bond paying an annual coupon of 3.00%. The bond’s yield is 4.00% and its face value is $1,000. Compute the value of the bond. (5 marks)
  4. Compute the value of the bond if the yield changes to 4.01%, hence or otherwise estimate the duration of the bond. (5 marks)
  5. An investor purchases bonds from part (c) with a market value of $1,000,000. Immediately afterwards the bond’s yield increases from 4.00% to 4.50%, Use the duration estimate from part (d) to estimate the new value of the investor’s bond holding. (5 marks)

[Total 25 marks]

Question 2

  1. Explain how a bond may be valued using a yield to maturity approach or using a set of zero-coupon interest rates. Also explain the relative advantages of each method of valuation. (5 marks)
  2. Consider the following bond price information for one-, two- and three-year annual bonds by the same issuer. Determine the associated zero-coupon discount rates using the method of bootstrapping. Assume all bonds have a face value of €100. (5 marks)

  1. Consider Use the zero-coupon interest rate from part (b) to determine the value of a three-year annual bond by the same issuer paying an annual coupon of 5.00%. (5 marks)
  2. An investor is considering purchasing a five-year floating rate bond with a face value of €1,000 that pays semi-annual coupon based on the 6-month Euribor interest rate. Assume that the 6-month Euribor interest rate is 1.00% on the day the bond is issued. What cashflow will the investor receive in six months’ time, what will determine subsequent cashflows received by the investor? (5 marks)
  3. Immediately after the investor purchases the bond, interest rates increase by 0.10%. Compute the new value of the bond and hence determine its duration. Comment on the magnitude of this duration value in comparison to the duration of a five-year fixed rate bond. (5 marks)

[Total 25 marks]

Question 3

  1. Describe the dividend discount method for valuing equity securities. Critically analyse the assumptions underpinning this method and the limitations of this approach. (5 marks)                        The Coca-Cola Company manufactures, markets, and distributes soft drink concentrates and syrups. The Company also distributes and markets juice and juice-drink products. Coca-Cola distributes its products to retailers and wholesalers in the United States and internationally.
  2. The chart below shows the history of Coca Cola’s annualized dividends over the last 10 years. State and explain whether you believe that Coca Cola is a suitable company for valuation using the dividend discount model. (5 marks)

  1. The chart below is a scatter diagram showing the weekly returns on Coca Cola stock on the y-axis versus the weekly returns on the S&P 500 on the x-axis. The ordinary least squares line of best fit is plotted on the chart and the equation of this line is also shown on this chart. The current long term US Treasury bond yield is 1.4%, the consensus market risk premium is 8.3%. Use this information together with the Capital Asset Pricing Model (CAPM) to estimate the required return on equity for Coca Cola. (5 marks)

  1. The most recent dividend payment for Coca Cola in September 2021, corresponded with an annual dividend of $1.67. The September 2011 dividend was $0.93. Use this information to compute the average dividend growth rate over this time. The most recent return on equity value for Coca Cola was 40.3%. Coca Cola’s dividend payout ratio is 89%. Explain the two underlined terms and estimate the sustainable growth rate for Coca Cola. (5 marks)
  2. Use the required return on equity value from part (c) and both the average growth rate and the sustainable growth rate valued from part (d) to estimate the value of Coca Cola stock. Assume that the Gordon Growth model is applicable. Comment on the results. (5 marks)

[Total 25 marks]

Question 4

  1. Describe and critically analyse the role of Alternative Assets in the context of portfolio management. You should consider the risks and benefits associated with these types of investments versus traditional assets. (10 marks)
  2. What is meant by an option, in your answer you should distinguish between a Call option and a Put option and between an American option and a European option. How should the value of an American option compare to an otherwise identical European option? (5 marks)
  3. The current price of Brent Crude Oil is $84.00 per barrel. An investor is considering buying a one-month European call option with a strike price of $90 per barrel for a premium of $3.50. The investor is also considering a ‘spread trade’ whereby they purchase a one- month European call option with a strike price of $90 for $3.50 and simultaneously sell a one-month European call option with a strike price of $95 for $1.50 (5 marks).
  4. How would you describe the strategies described above? Bullish, bearish, or neutral, explain.    Compute maximum upside, downside, and breakeven price for both strategies.
  5. How would you expect the value of the call option to change as a result of changing market perceptions of volatility? Explain.
  6. Consider the zero-coupon interest rates shown in the table below. Use this information to determine the 1-year vs. 2-year forward interest rate and the 2-year vs. 3-year forward interest rate.
MaturityInterest Rate


Do you expect that these forward rates will represent the actual one-year US dollar interest rates in two- and three-years’ time? Explain. (5 marks)

[Total 25 Marks]

Asset Valuation Online Open Book Exam