National College of Ireland
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MSc in Finance – Full-time – Year 1 –1MSCFIND1
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Semester ONE Examinations1– 2021 / 2022
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Saturday 8 January
1 2022
10.00am
to 1.00pm
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W Asset Valuation
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Dr. Alessia Paccagnini
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Mr. Joe Naughton
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Duration of exam:
Attachments:
3 hours
None
Answer all questions – total marks 25
Online Open Book Exam
You should answer only the required number of questions.
If you answer more than the required number of questions you should cancel (put a line through) the
question(s) you do not want marked.
If you do not cancel extra questions, the examiner will mark the questions in the order presented in
your answer book until the required number of questions have been marked.
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Question 1
a. Describe and critically analyse the risks an investor may experience in managing a portfolio of
corporate bonds.
(5 marks)
b. Critically analyse the use of Duration as a measure of interest rate risk for a bond.
(5 marks)
c. 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)
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d. Compute the value of the bond if the yield changes to 4.01%, hence or otherwise estimate the
duration of the bond.
(5 marks)
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An investor purchases bonds from part D
(c) with a market value of $1,000,000. Immediately
afterwards the bond’s yield increases from
A 4.00% to 4.50%, Use the duration estimate from part
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(d) to estimate the new value of theLinvestor’s bond holding.
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(5 marks)
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[Total 25 marks]
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Question 2
a. Explain how a bond may be valued using a yield to maturity approach or using a set of zerocoupon interest rates. Also explain the relative advantages of each method of valuation.
(5 marks)
b. 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.
Maturity (years)
1
2
3
Price
100.000
96.281
102.673
Yield
Coupon
4.00%
4.00%
5.00%
3.00%
6.00%
7.00%
(5 marks)
c. 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)
d. 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 6month Euribor interest rate is 1.00% on the day the bond is issued. What cashflow will the
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investor receive in six months’ time, what will determine subsequent cashflows received by the
investor?
(5 marks)
e. 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
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a. Describe the dividend discount method for valuing equity securities. Critically analyse the
assumptions underpinning this method and the limitations of this approach.
(5 marks)
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b.
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The Coca-Cola Company manufactures,D
markets, and distributes soft drink concentrates and
syrups. The Company also distributesAand markets juice and juice-drink products. Coca-Cola
Owholesalers in the United States and internationally.
distributes its products to retailers L
and
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The chart below shows the history of Coca Cola’s annualized dividends over the last 10 years.
Oyou believe that Coca Cola is a suitable company for valuation using
State and explain whether
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the dividend discount
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(5 marks)
c. The chart below is a scatter diagram showing the weekly returns on Coca Cola stock on the yaxis 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)
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d. 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.
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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)
e. 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
a. 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)
b. 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)
c. 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.
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i.
ii.
iii.
How would you describe the strategies described above? Bullish, bearish, or
neutral, explain.
Compute maximum upside, downside, and breakeven price for both strategies.
How would you expect the value of the call option to change as a result of
changing market perceptions of volatility? Explain.
(5 marks)
d. 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.
Maturity
1-year
2-year
3-year
Interest Rate
0.14%
0.30%
0.65%
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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]
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