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BCO224 Financial Markets Task brief & rubrics Task: Final Assignment • • Individual Submission file type:

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BCO224 Financial Markets Task brief & rubrics Task: Final Assignment • • Individual Submission file type: .pdf or .doc. Formalities: • • • • Wordcount: no word limits. Font: Arial 12,5 pts. Text alignment: Justified. The in-text References and the Bibliography have to be in Harvard’s citation style. Submission: Week 13– Via Moodle (Turnitin). Sunday, 9th of May. Time 23:55. It assesses the following learning outcomes: • • • • • Demonstrate a deep understanding of the role of financial markets and financial institutions Examine the financial instruments Critically evaluate what interest rates mean and why interest rates change Demonstrate understanding of bond prices and bond yields Analyze stock price changes and demonstrate understanding of foreign exchange rates and its effect on businesses EXERCISES Question 1 (20 points) Suppose there are two bonds you are considering: Bond A 15 6 1000 Maturity (years) Annual Coupon rate (%) Par Value Bond B 25 4 1000 a. If both bonds had a required rate of return of 5%, what would the bonds’ prices be? b. Re-calculate the prices of the bonds if the required return falls to 7%. Could you explain why the price increases or decreases given this change in required return? Question 2 (20 points) Calculate the NAV (Net asset value) of the following fund, assuming 500 shares are outstanding. Calculate the percentage change in the NAV of the fund if stock C climbs to $50.7. Stock A B C Cash Shares owned 1,500 4,000 2,000 n.a. price $6.75 $45.30 $32.04 $3,508 a) Will the NAV increase or decrease? Why? b) Calculated your return on your investment given the change in NAV Question 3 (20 points) Suppose the Swiss Franc is currently traded at CHF 0.89/$. The British Pound is traded at GBP 0.79/$. Ignoring transaction costs: a. Determine the CHF/GBP exchange rate consistent with these direct quotations. b. Suppose the CHF/GBP cross rate in the market was at CHF 1.05/GBP. Is there any arbitrage opportunity? Question 4 (30 points) Consider the following three stocks: • Stock A is expected to provide a dividend of $50 a share forever • Stock B is expected to pay a dividend of $8 next year. Thereafter, dividend growth is expected to be 2% a year forever. • Stock C is expected to pay a dividend of $15 next year. Thereafter, dividend growth is expected to be 12% a year for 4 years (until year 5) and zero thereafter. a. If the market capitalization rate for each stock is 8%, which stock is the most valuable? b. What happens if the capitalization rate drops to 6%? Explain c. Assume EPS for stock A is 4, Stock B 9, and Stock C 15. Calculate the P/E ratio for each. Briefly explain what the different values mean to you. Question 5 (10 points) Word limit: 500 words. Imagine that you have 100 000 EUR for medium-term investments. Which asset classes you would choose? (Specify share of each asset class). How would you manage the risk of your investment protfolio? (Be concrete) Would you pick some individual securities or would you invest in broad market portfolios? Why? If you decided to invest in some individual securities, explain how would you choose securities to your portfolio? Rubrics: Application (30%) Student applies fully relevant knowledge from the topics delivered in class. Good 80-89 Student demonstrates good understanding of the task and mentions some relevant concepts and demonstrates use of the relevant vocabulary. Student applies mostly relevant knowledge from the topics delivered in class. Critical Thinking (30%) Student critically assesses in excellent ways, drawing outstanding conclusions from relevant authors. Student critically assesses in good ways, drawing conclusions from relevant authors and references. Communication (20%) Student communicates their ideas extremely clearly and concisely, respecting word count, grammar and spellcheck Student communicates their ideas clearly and concisely, respecting word count, grammar and spellcheck Knowledge & Understanding (20%) Exceptional 90-100 Student demonstrates excellent understanding of key concepts and uses vocabulary in an entirely appropriate manner. Fair 70-79 Student understands the task and provides minimum theory and/or some use of vocabulary. Student applies some relevant knowledge from the topics delivered in class. Misunderstanding may be evident. Student provides some insights but stays on the surface of the topic. References may not be relevant. Student communicates their ideas with some clarity and concision. It may be slightly over or under the wordcount limit. Some misspelling errors may be evident. Marginal fail 60-69 Student understands the task and attempts to answer the question but does not mention key concepts or uses minimum amount of relevant vocabulary. Student applies little relevant knowledge from the topics delivered in class. Misunderstands are evident. Student makes little or none critical thinking insights, does not quote appropriate authors, and does not provide valid sources. Student communicates their ideas in a somewhat unclear and unconcise way. Does not reach or does exceed wordcount excessively and misspelling errors are evident.