NAME,  

Ezatullah STUDEN Y1812.130177

SURNAME Saddiqi T
NUMBER
DEPARTMEN  Business Administration
T
COURSE ISM515 FINANCIAL MARKETS AND INSTITUTIONS
NAME
HOMEWORK HW
TITLE
HOMEWORK ASSESSMENT SCALE
Question 1
Essay Part 15 POINTS
Problem Part 15 POINTS

Question 2
Explanation 20 POINTS
Your Idea And 20 POINTS
Explanation
Question 3
Calculation 15 POINTS
Plotting 15 POINTS
 ISM515 FINANCIAL MARKETS AND INSTITUTIONS 05.05.2020

Deadline:10-05-2020
Student ID: Y1812.130177
Student name, sur name: Ezatullah Saddiqi
1) Describe the cash flows received from owning a coupon bond.by giving example.
(30PTS)

Answer:
A bond represents a debt instrument floated by a company for raising funds. It comes with a fixed
coupon rate.
Firstly, a bond pays out periodic coupons which are nothing but interest payments on the
investment. This can come quarterly, semi-annually or annually.
A bond also gives out its par value to the investor on completion of the maturity term.
Example: A 5% bond with a par value of $1000 was purchased for $950 for a term of 10 years.
The coupons are annual.
The bondholder will receive:
Annual coupons every year for 10 years = 5%*1000 = $50
Par value of $1000 at the end of 10th year.

0 1 2 3 4 5

P0 $100 $100 $100 $100 $100

$1,000

2) A-Explain EMH (efficient market hypothesis). (20PTS) B-What are the implications
of the EMH for corporate managers? (please consider free cash flow, financial
statements, accounting and investment) (20pts)

Answer:
The EMH says that stock prices always reflect their fair price; these stocks every time trade at
their actual value because all the information related to the company is available to all public.
This also implies that an investor cannot get higher returns because they cannot purchase
undervalued stocks. After all, all the shares trade at their values.
Now if the market is efficient and all information is available to all public this means any manager
cannot do insider trading because they have not any superior information than the public. So, this
means managers cannot involve themselves in insider trading which is unethical and even illegal
in some countries.
If the market is in an efficient form, then it is very difficult for traders to manipulate the market
because every single information is accessible to all; which means the company in which the
manger is a stakeholder, their price cannot be manipulated.
If the stock will reflect the exact price of share which means if the market reflects the fair market
value of the company, their performance can be judged efficiently whether they are creating value
for the company or not.
 
Bond with coupon provides cash flows as coupon payment in regular intervals and cash flow as
face value at maturity.
For example, a company x issued a bond with a face value of $1,000 and a coupon rate of 1%
annually for 10 years; this means that the company is liable to pay $10 as coupon payment
annually for 10 years and $1,000 at maturity.

Efficient Market Analysis (EMH): states that market has all the information abound all stocks
means information about stocks are readily available in market so that no investor can take edge
over other investor. EMH does not require that investors be rational, it says that individual
investor can act randomly but as a whole market is right. In simple words efficient means normal.
E.g. for unusual reaction for unusual situation is normal. There are three forms of market
1 Weak Form 2. Semi weak 3. Strong Form.

There are several implications for corporate managers such as:

1.Managers should maximize the current value of stock.

2.There is no benefit from manipulating the EPS of share.
3.Security returns are meaningful measures of firm performance.

3) The following table summarizes prices of various default-free zero-coupon bonds

(expressed as a percentage of face value):

Maturity (years) 1 2 3 4 5
Price (per $100 face
value) 94.63 89.75 85.30 81.74 78.47

A- Compute the yield to maturity for each of the five zero-coupon bonds. (15 PTS)
Answer: Maturity
(years) 1 2 3 4 5
Price (per $100 face
value) 94.63 89.75 85.30 81.74 78.47
Yield to maturity 5.67% 5.55% 5.38% 5.17% 4.97%

YTM= (PACE OF VALUE/PRICE) ^1/n -1

Maturity Price YTM

1 94.63 = (100/94.63)-1=5.67%

2 89.75 = (100/89.75) ^1/2-1=5.55%

3 85.30 = (100/85.30) ^1/3-1=5.38%

4 81.74 = (100/81.74) ^1/4-1=5.17%

5 78.47 = (100/78.47) ^1/5-1=4.97%

Par Value 100

Since, these are zero coupon bonds, therefore PMT=0

As YTM graph is downward sloping, it indicated there is a recession coming in the market That is
because short term rates are generally lower than long term rates but here the trend is opposite.
This means that investors are risk averse and hence not buying longer term bonds which is driving
down the prices of the bond.

YTM
100
90
80
70
60
50
40
30
20
10
0
1 2 3 4 5

B- Plot the zero-coupon yield curve (for the first five years). (15PTS)