ID Name

2225427660 Rafiqul Islam

2235228660 Salman Khair
2315347660 Sartaz Zahir
2235206060 Masudur Rahman Nabil
2235356060 Dhruba Sen
 Calculating Duration on a $1,000 10-Year 10% Coupon Bond when Its Interest Rate Is 9%. If a
pension fund manager is holding a 10-year 10% coupon bond in the fund’s portfolio, and the
interest rate is currently 9%, what loss would the fund be exposed to if the interest rate rises to
10% tomorrow?
Par value= 1000 Yr CF DCF Wt Wt*Yr
Cpn rate= 10.00% 1 $ 100 $ 91.74 0.0741039311 0.0741039310570361
Cpn Pmt= 100 2 $ 100 $ 84.17 0.0679852579 0.135970515700984
Rate= 9% 3 $ 100 $ 77.22 0.0623717962 0.187115388579335
N= 10 yrs 4 $ 100 $ 70.84 0.0572218314 0.228887325479309
PV= $ 1,238.03 5 $ 100 $ 64.99 0.052497093 0.262485464999208
6 $ 1,100 $ 655.89 0.5297871771 3.17872306237573
7 $ 100 $ 54.70 0.0441857529 0.309300270178345
8 $ 100 $ 50.19 0.040537388 0.324299103725656
9 $ 100 $ 46.04 0.0371902642 0.334712377698498
10 $ 100 $ 42.24 0.0341195084 0.341195084300202
$ 1,238.03 5.3767925240943

Dur(years) 5.38
% change in P -4.93%
 A 3-year, $1,000 par, zero-coupon corporate bond has a hazard rate of 3% per yea
probability of default, loss giv

FV= $ 1,000.00
N= 3 yr
Coupon rate= 0%
Coupon payment= $ -
Benchmark Rate(flat)= 5.0% per yr
Hazard rate= 3.0% per yr
Recovery rate= 70%
orate bond has a hazard rate of 3% per year. Its recovery rate is 70% and the benchmark rate cu
probability of default, loss given default, CVA, and the credit spread on the bond.

Year
1
2
3

An identical benchmark bond should trade at $1000 / 1.158 = $863.84

Rate=
Year
1
2
3

Therefore, the value of credit risky bond =

70% and the benchmark rate curve is flat at 5%. Calculate the expected exposure,
he credit spread on the bond.

Probability of Expect
Exposure Loss given default (LGD) default (PD) ed loss
$ 907.03 $ 272.11 3.00% $ 8.16
$ 952.38 $ 285.71 2.91% $ 8.31
$ 1,000.00 $ 300.00 2.82% $ 8.47
CVA=

5.0%
CF DCF
$ - $ -
$ - $ -
$ 1,000.00 $ 863.84
$ 863.84
$ 863.84 -CVA=
e expected exposure,

PV of exp. Loss
$ 7.77
$ 7.54
$ 7.32
$ 22.63

Credit spread calculation:

FV= $ 1,000.00
N= 3 yr
Coupon rate= 0%
Coupon payment= $ -
PV= $ 841.21
$ 841.21 RATE (YTM) = 5.93% per yr
YTM on risky bond= 5.93%
Besides,
YTM on risk-free bond (given): 5.0% (Given)
Credit spread = YTM risky – YTM risk-free = 0.93%
 Given the following zero-coupon yields, compare the yield to maturity for a three-yea
coupon bond, a three-year coupon bond with 5% annual coupons, and a three-year c
bond with 9% annual coupons. All of these bonds are default free.

Maturity Zero-Coupon FV
(years) YTM (assuming)
1 4.00% $1,000
2 4.50% $1,000
3 5.00% $1,000 $863.84
4 5.50% $1,000
5 6.00% $1,000

3 year coupon bond with 5% annual coupons

Yr CF Zero Cpn YTM DCF
N= 3 1 $50 4.00% $ 48.08
Cpn rt= 5% 2 $50 4.50% $ 45.79
FV= $1,000 3 $50 5.00% $ 43.19
3 $1,000 5.00% $ 863.84
PV $ 1,000.89
YTM 4.9672%

3 year coupon bond with 9% annual coupons

Yr CF Zero Cpn YTM DCF
N= 3 1 $90 4.00% $ 86.54
Cpn rt= 9% 2 $90 4.50% $ 82.42
FV= $1,000 3 $90 5.00% $ 77.75
3 $1,000 5.00% $ 863.84
PV $ 1,110.54
YTM 4.9452%

Comparison results

YTM0>YTM5>YTM9
urity for a three-year zero-
, and a three-year coupon
e default free.
 You have just turned 22 years old, received your bachelor’s degree, and accepted your first job. Now you must dec
your retirement plan. The plan works as follows: Every dollar in the plan earns 6.7% per year. Yo
withdrawals until you retire on your 65th birthday. After that, you can make withdrawals as you see fit. You decide
and work until you turn 65. You estimate that to live comfortably in retirement, you will need $115,000 per year, st
of retirement and ending on your 100th birthday. You will contribute the same amount to the plan at the end of eve
do you need to contribute each year to fund your retirement?

(the suffix 1 represents the time from age 22-65; suffix 2 represents the time from age 65-100)
N1= 42 yrs
N2= 35 yrs
Rate= 6.70% per yr
PMT2= $115,000
PVA2= $1,539,052.73 (This is the FV of the original annuity starting after my 22nd year)
PMT1= $7,242.75 (This is the contribution needed each year to fund my retirement plan)
rst job. Now you must decide how much money to put into
an earns 6.7% per year. You cannot make
s as you see fit. You decide that you will plan to live to 100
need $115,000 per year, starting at the end of the first year
the plan at the end of every year that you work. How much
our retirement?
 You are thinking of making an investment in a new factory. The factory will generate revenues of $1.71 million p
expect that the maintenance costs will start at $97,470 per year and will increase 5% per year thereafter. Assume th
at the end of the year. You intend to run the factory as long as it continues to make a positive cash flow (as long as
maintenance costs). The factory can be built and become operational immediately and the interest rate is 6% p
revenues? What is the present value of the maintenance costs? If the plant costs $17.1 million to build,

PV of Revenues PV of Maintenance Costs

pmt= $ 1.71 million pmt= $ 0.097 million
r= 6% r= 6%
g= 0% g= 5%
PV (growing perpetuity) $ 28.50 million PVOpex $ 9.75 million
PVCapex $ 17.10 million
$ 26.85 million
Net revenue= $ 1.65 million
Investment Decision -> YES Because PVRev > PV of Total Maintenance Cost
 venues of $1.71 million per year for as long as you maintain it. You
year thereafter. Assume that all revenue and maintenance costs occur
tive cash flow (as long as the cash generated by the plant exceeds the
d the interest rate is 6% per year. What is the present value of the
sts $17.1 million to build, should you invest in the factory?
 You are thinking of purchasing a house. The house costs $350,000. You have $50,000 in cash that you can use as a
borrow the rest of the purchase price. The bank is offering a 30-year mortgage that requires annual payments and
your annual payment be if you sign this mortgage?
You would like to buy the house and take the mortgage described above. You can afford to pay only $23,500 per y
amount each year, yet still borrow $300,000. At the end of the mortgage (in 30 years), you must make a balloon pa
balance on the mortgage. How much will this balloon payment be?

House cost= $350,000 House cost= $350,000

D/P= $50,000 D/P= $50,000
Loan= $300,000 Loan= $300,000
Bank int rt= 7% Bank int rt= 7%
N= 30 yrs N= 30
Pmt= $24,175.92 Pmt= $23,500.00
FV= $63,848.03
50,000. You have $50,000 in cash that you can use as a down payment on the house, but you need to
a 30-year mortgage that requires annual payments and has an interest rate of 7% per year. What will
r annual payment be if you sign this mortgage?
scribed above. You can afford to pay only $23,500 per year. The bank agrees to allow you to pay this
the mortgage (in 30 years), you must make a balloon payment; that is, you must repay the remaining
he mortgage. How much will this balloon payment be?

yrs
(this is fixed now)
this is the balloon payment to be made at the end of the loan tenure
 You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are
continuing on every birthday up to and including your 65th birthday, that you will put the same amount into a savi
each year to ensure that you will have $2 million in the account on

FV = $ 2,180,000
Rate = 9% Per Year Starting PMT on Bday 22
Number of Years = 44 Years Ending PMT on Bday 65
PMT = $ 4,527
 $2 million by the time you are 65. Today is your 22nd birthday, and you decide, starting today and
ut the same amount into a savings account. If the interest rate is 9%, how much must you set aside
ve $2 million in the account on your 65th birthday?
 You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 year
million in its first year and that this amount will grow at a rate of 6% per year for the next 17 years. Once the patent
able to produce the same drug and competition will likely drive profits to zero. What is the present value of the

CF1 = $ 2,000,000
Rate = 9% Per Year
Growth Rate = 6% Per Year
Number of Years = 17 Years
PVGA = $ 70,666,667
ent on the drug will last 17 years. You expect that the drug’s profits will be $2
next 17 years. Once the patent expires, other pharmaceutical companies will be
What is the present value of the new drug if the interest rate is 9% per year?
You are trying to decide how much to save for retirement. Assume you plan to save $5000 per year with the first in
in 43 years, immediately after m
A. How much will you have in your re
B. If, instead of investing $5000 per year, you wanted to make one lump-sum investment today for you
C. If you hope to live for 20 years in retirement, how much can you withdraw every year in retirement (starting one
continue to earn
D. If, instead, you decide to withdraw $300,000 per year in retirement (again with the first w
E. Assuming the most you can afford to save is $1000 per year, but you want to retire with $1 m

Answer - A
PMT= $ (5,000.00) Answer D
N= 43 yrs PMT= $300,000
Rate= 10% per yr N= 45.8
FVA= $2,962,003 Rate= 10%
PVA= ($2,962,003)
Answer B
PV= $49,170 Answer E
PMT= $ (1,000.00)
Answer C N= 43 yrs
PMT= $347,916 Rate= 11.74% per yr
N= 20 FVA= $1,000,000
Rate= 10%
PVA= ($2,962,003)
 0 per year with the first investment made one year from now. You think you can earn 10% per year on your investments and y
years, immediately after making your last $5000 investment.
ch will you have in your retirement account on the day you retire?
m investment today for your retirement that will result in the same retirement saving, how much would that lump sum need to
in retirement (starting one year after retirement) so that you will just exhaust your savings with the 20th withdrawal (assume y
continue to earn 10% in retirement)?
ment (again with the first withdrawal one year after retiring), how many years will it take until you exhaust your savings?
u want to retire with $1 million in your investment account, how high of a return do you need to earn on your investments?

Answers
A. $2,962,003
B. $49,170
C. $347,916
D. 45.8
E. 11.74%
our investments and you plan to retire

hat lump sum need to be?

h withdrawal (assume your savings will

st your savings?
n your investments?
 When Alex Rodriguez moved to the Texas Rangers in 2001, he received a lot of attention for his “$252 million” con
the following in order to determine the valu
Rodriguez earns $16 million in the first year, $17 million in years 2 through 4, $19 million in years 5 and 6, $23 mill
equally over the first 5 years ($2 million per year). His deferred payments begin in 2011. The deferred payment a
2020). However, the actual payouts will be different. All of the deferred payments will earn 3% per year until the
actually be $6.7196 million when paid. Assume that the $4 million payment deferred to 2012 is deferred from 20
component so that cash flows are paid out over a total of 20 years. The contractual payments, signing bonus, and d
year they are earned, but instead are pa
Assume that an appropriate discount rate for A-Rod to apply to the contract payments is 7% per year. Calculate th
million. What explains t

Rate 7%
Cal. Year Year Earning Sign Bon Def PMT Actual PMT CF DCF
2001 1 $ 16 $ 2 5 $ 18.00 $ 16.82
2002 2 $ 17 $ 2 4 $ 19.00 $ 16.60
2003 3 $ 17 $ 2 3 $ 19.00 $ 15.51
2004 4 $ 17 $ 2 3 $ 19.00 $ 14.50
2005 5 $ 19 $ 2 3 $ 21.00 $ 14.97
2006 6 $ 19 3 $ 19.00 $ 12.66
2007 7 $ 23 3 $ 23.00 $ 14.32
2008 8 $ 27 3 $ 27.00 $ 15.71
2009 9 $ 27 3 $ 27.00 $ 14.69
2010 10 $ 27 3 $ 27.00 $ 13.73
2011 11 $ 6.72 $ 6.72 $ 3.19
2012 12 $ 5.38 $ 5.38 $ 2.39
2013 13 $ 4.03 $ 4.03 $ 1.67
2014 14 $ 4.03 $ 4.03 $ 1.56
2015 15 $ 4.03 $ 4.03 $ 1.46
2016 16 $ 4.03 $ 4.03 $ 1.37
2017 17 $ 4.03 $ 4.03 $ 1.28
2018 18 $ 4.03 $ 4.03 $ 1.19
2019 19 $ 4.03 $ 4.03 $ 1.11
2020 20 $ 4.03 $ 4.03 $ 1.04
$ 165.77

The difference between the present value of the contract ($165.77) and the quoted $252 million is explained by two key
1. Deferred Payments and Interest Accumulation: Although the quoted value of the contract includes the $33 million in
interest at 3% annually. When these payments are made 10 years later, their nominal value is higher due to the interest e
are worth less today.
2. Discounting at 7%: The present value calculation applies a discount rate of 7% to the future payments. This rate reflec
same amount received today. Since A-Rod's payments are spread over time, especially with significant deferred compone
quoted $252 million does not account for the reduced value of these future payments when discounted back to the cont
These two factors cause the present value of the contract to be lower than the nominal quoted figure of $252 million.
 his “$252 million” contract (the total of the payments promised was $252 million). He later moved to the Yankees, but assume
to determine the value of his contract when he signed it:
years 5 and 6, $23 million in year 7, and $27 million in years 8 through 10. He also receives his $10 million signing bonus spread
he deferred payment amounts total $33 million and are $5 million, then $4 million, then eight amounts of $3 million (ending in
rn 3% per year until they are paid. For example, the $5 million is deferred from 2001 to 2011, or 10 years, meaning that it will
12 is deferred from 2002 (each payment is deferred 10 years). The contract is a 10-year contract, but each year has a deferred
s, signing bonus, and deferred components are given below. Note that, by contract, the deferred components are not paid in th
ned, but instead are paid (plus interest) 10 years later.
% per year. Calculate the present value of the contract. Compare the present value of the contract to the quoted value of $252
million. What explains the difference?

is explained by two key factors:

ludes the $33 million in deferred payments, these amounts are not paid immediately. They are deferred and earn
her due to the interest earned, but their present value when the contract is signed is lower, as future cash flows
yments. This rate reflects the time value of money, meaning money received in the future is worth less than the
ficant deferred components, discounting reduces the present value of these future payments. Therefore, the
ounted back to the contract signing date.
gure of $252 million.
 to the Yankees, but assume

million signing bonus spread

unts of $3 million (ending in
years, meaning that it will
ut each year has a deferred
mponents are not paid in the

o the quoted value of $252