1、Introduction to advanced financial management,Part A Role and responsibilities towards stakeholders,Part B Advanced investment appraisal,Part C Acquisitions and mergers,Part D Corporate reconstruction and reorganization,Part E Treasury and advanced risk management techniques,Part F Economic environm
2、ent for multinationals,Part G Emerging issues,Section B TWO questions ONLY to be attempted(2011.6),GNT Co is considering an investment in one of two corporate bonds. Both bonds have a par value of $1,000 and pay coupon interest on an annual basis. The market price of the first bond is $1,07968. Its
3、coupon rate is 6% and it is due to be redeemed at par in five years. The second bond is about to be issued with a coupon rate of 4% and will also be redeemable at par in five years. Both bonds are expected to have the same gross redemption yields (yields to maturity).,GNT Co considers duration of th
4、e bond to be a key factor when making decisions on which bond to invest.,Required: (a) Estimate the Macaulay duration of the two bonds GNT Co is considering for investment. (9 marks) (b) Discuss how useful duration is as a measure of the sensitivity of a bond price to changes in interest rates. (8 m
5、arks),3 (a) In order to calculate the duration of the two bonds, the present value of the annual cash flows and the price or value at which the bonds are trading at need to be determined. To determine the present value of the annual cash flows, they need to be discounted by the gross redemption yiel
6、d (i).,Gross Redemption Yield Try 5% 60 x 1051 + 60 x 1052 + 60 x 1053 + 60 x 1054 + 1,060 x 1055 =60 x 43295 + 1,000 x 07835 = 1,04327,Try 4% 60 x 44518 + 1,000 x 08219 = 1,08901 i = 4 + (1,08901 1,07968)/(1,08901 1,04327) = 42%,Bond 1 (PV of cash flows) 60 x 10421 + 60 x 10422 + 60 x 10423 + 60 x
7、10424 + 1,060 x 10425 PV of cash flows (years 1 to 5) = 5758 + 5526 + 5303 + 5090 + 86291 = 1,07968 Market price = $1,07968,Duration = 5758 x 1 + 5526 x 2 + 5303 x 3 + 5090 x 4 + 86291 x 5/1,07968 = 449 years,Bond 2 (PV of Coupons and Bond Price) Price = 40 x 10421 + 40 x 10422 + 40 x 10423 + 40 x 1
8、0424 + 1,040 x 10425,PV of cash flows (years 1 to 5) = 3839 + 3684 + 3536 + 3393 + 84663 = 99115,Market Price = $99115 Duration = 3839 x 1 + 3684 x 2 + 3536 x 3 + 3393 x 4 + 84663 x 5/99115 = 463 years,(b) 1、The sensitivity of bond prices to changes in interest rates is dependent on their redemption
9、 dates. Bonds which are due to be redeemed at a later date are more price-sensitive to interest rate changes, and therefore are riskier.（敏感性取决于期限，长，敏感）,2、（同期限，利率高，回收快，敏感性低）Duration measures the average time it takes for a bond to pay its coupons and principal and therefore measures the redemption pe
10、riod of a bond. It recognises that bonds which pay higher coupons effectively mature sooner compared to bonds which pay lower coupons, even if the redemption dates of the bonds are the same. This is because a higher proportion of the higher coupon bonds income is received sooner. Therefore these bon
11、ds are less sensitive to interest rate changes and will have a lower duration.(利息收回来了，利率变化已经没关系了，更谈不上敏感了。),Duration,Actual relationship,Interest rate,Bond value,3、Duration, on the other hand, assumes that the relationship between changes in interest rates and the resultant bond is linear. As interes
12、t rates increase, the price of a bond decreases and vice versa, but this decrease is not proportional for coupon paying bonds, the relationship is non-linear.,Duration,Actual relationship,Interest rate,Bond value,4、 Duration is only useful in assessing small changes in interest rates because of conv
13、exity .Duration will predict a lower price than the actual price and for large changes in interest rates this difference can be significant.,Perfect Market,Company Valuation,Net asset valuation (NAV),Value basis,Example : Company is going concern,Price/Earning (P/E) Ratio Method,: Comment: Simplistic, takes no account of the future growth of company,Dividend Valuation Model (DVM),Example :ABC Company,Free cash flow (FCF) appropriate for merge or investment,Example: G plc intends to acquire H PLC.,Overall Conclusion,Takeover,
