Finc 599 Homework 1

FINC 599 Homework 1

Name: Jiayu Liu

Chapter 1

1. Cash flow = Coupon pament 100,000* 7%/2 =$3500

2. Cash flow= 0

3. a). reference rate = 1- month LIBOR

b). quote margin = 220 basis point =2.2%

c). If 1-month LIBOR = 2.8%

Floating coupon rate = 2.8%+2.2% = 5%

11. a) Advantage of call provision for an issuer is this provision grants the issuer the right to retire the debt, fully or partially, before the scheduled maturity date.

Inclusion of a call feature benefits bond issuers by allowing them to replace an outstanding bond issue with a new bond issue that has a lower coupon rate than the outstanding bond issue because market interest rates have declined. A call provision effectively allows the issuer to alter the maturity of a bond.

b). Disadvantage for call provision to bondholder is this add two dimension of risk to bondholders. The one is reinvestment risk the other one is its limits a bond’s potential price appreciation.

18. Counterparty risk is a form of credit risk that involves transactions between two parties in a trade.

Here are two examples. There are strategies that involve borrowing funds to purchase a bond. In this transaction, the lender of funds is exposed to counterparty risk because there is the risk that the borrower will fail to repay the loan. A second example of where counterparty risk is faced is when there is a trade in a derivative instrument. Some of these instruments are traded on an exchange, and in such trades, the exchange becomes the ultimate counterparty to the trade.

21. CUSIP stands for Committee on Uniform

Security Identification Procedures. The CUSIP numbering system is owned by the American Bankers Association and operated by Standard & Poor’s.

CUSIP numbers are important for a well-functioning securities market because they aid market participants in properly identifying securities that are the subject of a trade and in the clearing/settlement process.

Specifically, the first six characters identify the issuer: the corporation, government agency, or municipality. The next two characters identify whether the issue is debt or equity and the issuer of the issue. The last character is simply a check character that allows for accuracy checking and is sometimes truncated or ignored; that is, only the first characters are listed.