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Will identify a public company that has at least two bond issues outstanding. One bond should have about five years to maturity and the other should have about fifteen years to maturity. You will also identify two US Treasury instruments, each maturing at about the same time as each of the corporate bonds.
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Check My Assignment!You will keep track of the S&P 500 index, the company’s stock price, the bond prices and their yields to maturity at least twice weekly. You will compute the spreads of the two bonds and changes over the period of your observation. (The spread is the difference between the yield to maturity (YTM) on the corporate bond and the YTM on the comparable Treasury issue.) Data collection should proceed through Nov. 16. You will be collecting a fair amount of data over the period of observation and you will be required to interpret this data and see what the data is telling us.
1.) For the two corporate bonds, the two matching Treasury instruments, the stock price and the S&P 500 index, calculate the standard deviation of prices. Divide that standard deviation by the mean to give a measure of risk that you can use to compare all six of these. Rank all of these from lowest to highest risk. Is this the order you anticipated?
2.) What are the credit spreads on the short term and longer term bonds? Do they seem compatible with the ratings of the bonds (provide ratings from the 3 agencies).
3.) Collect the start and end stock prices in each of the last 5 calendar years ending in December 2017 as well as the cash dividends paid each year. Using the DDM, calculate the required rate of return on equity (R).
For the DDM, R = Dividend yield + Capital Gain yield
Div. yield = Div1/Po
Capital Gain yield = (P1 – P0)/P0
Calculate R for each of the 5 years ending in 2017 and calculate the arithmetic average.
