Answer four questions
1. What is the relationship between pricing and market interest rates in the bond market? When is duration a useful measure for describing this relationship? When is duration insufficient?
2. A borrower seeking to buy a $250,000 property is considering two mortgage choices: a FRM or a FRM with an IO period. The lender offers the following three loans:
Loan 1 80% LTV 30 year FRM, fully amortizing monthly payments; 4.45% interest
Loan 2: 80% LTV 30 year FRM with 4 year IO period, fully amortizing monthly payments; 4.00% interest
Loan 3: 90% LTV 15 year FRM, fully amortizing monthly payments; 3.75% interest
How do these three loans compare on 1) monthly payments 2) total interest due over life of the loan? If you were deciding between these three loans, which would you pick and why? (2-3 sentences max.)
3. You are considering purchasing five-year corporate bonds as an investment. You have a choice of terms available. Which of the following terms would you find desirable, ceteris paribus? How does each feature affect the bond’s required rate of return? Explain.
a. Call feature
b. Convertible feature
c. Sinking fund
4. In what major ways do stocks differ from bonds? Discuss at least 3 differences