AP/ADMS4540 Assignment #1 Summer 2024

Instructions:

(1) This assignment is to be submitted individually in your own handwriting except for the submission of Excel graphs or printouts as required in Question 4. Discussion with other students is allowed. Any external sources used, including data sources, should be referenced. MAKE THIS PAGE AS THE TOP PAGE OF YOUR SUBMITTED ANSWER AND WRITE YOUR NAME, STUDENT # AND SECTION. USE REGULAR PAGES.

(2) This assignment is due by Wednesday, June 05, at 4:00pm in ATK 289.

(3) This assignment carries a total of 100 marks.

(4) This assignment (except for question 5) covers material to be tested on the midterm exam. So, it is important that you learn as much as possible from working on this assignment.

(5) This assignment must be handwritten. Any work that is not original handwritten (e.g., printed or photocopied) will receive zero credit. Work that is too difficult to read due to messiness and poor handwriting will also receive zero credit. You must show all the necessary working steps to receive full credit. You are to submit printouts of the Excel calculations or graphs for parts of the inflation and stock returns question 4 as instructed in the question and handwrite your answer to the other parts of question 4.

(6) Decimal places: please keep at least 4 in your calculations and round to the nearest penny or basis point in your final answers.

Question 1 ODA (20 Marks)

To qualify as official development assistance (ODA), development loans which are concessional in nature must have a grant element of at least 25 percent, calculated using a stated annual interest rate of 10 percent. Suppose Canada Infrastructure Bank has decided to consider a development loan to Haiti for its infrastructure development. The loan under consideration is as follows: $25,000,000 to be amortized over 7 years by 14 semi-annual payments, after a grace period of 4 years during which only interest would be paid semi-annually. This loan would charge interest at a stated annual rate of 5.5 percent.

I)              Determine whether this loan would qualify as ODA.

II)            What is the maximum interest rate that could be charged for this loan to qualify as ODA? Note: Show all working steps clearly.

(Important Note: Use a rate of 5% or 6% if you want to decrease or increase the subsidized rate for the calculation of maximum rate. Justify the change of your rate.)

Question 2 Bond Refunding (15 Marks)

Virginia Foods Group (VFG) is considering whether to refund an old issue of $90,000,000, 7.5 percent coupon (paid annually) twenty-year bonds that were sold eight years ago. A new issue of $100,000,000 twelve-year bonds can be sold with a coupon rate of 5.5 percent (paid annually). A call premium of 6.2 percent will be required to retire the old bonds and flotation costs of $8,000,000 will apply to the new issue. The tax rate applicable is 40 percent and VFG expects that there will be a one-month overlap during which any funds can be invested in Treasury bills yielding 1 percent. The additional $10,000,000 from the new bond issue could be invested in a twelve-year project with an expected net present value of $2,200,000. Should VFG refund the old issue of $90,000,000 bonds?   Note: Show all four working steps clearly.

Question 3

Part a) Risk and Return (10 Marks)

Watching YouTube Videos

a)    Watch the following YouTube videos on your PC or laptop or mobile device and then write up a two-page summary (max 500 words and max 2 pages) of what you learnt from these YouTube videos. There will not be an answer key provided for this question. Instead, the markers will also have watched these videos, and if what you write of these videos is consistent with their understanding and different from other students, you will receive full credit. Your essay answer must also be in your own handwriting.

Bear Stearns is fine?

https://www.youtube.com/watch?v=1QEKdsEfLY0

Lessons from the father of modern portfolio theory

http://www.youtube.com/watch?v=5Y1MBc_Vj3w

There are no shortcuts to investing: Nobel laureate William Sharpe

http://www.youtube.com/watch?v=pGIzygsvqck

Also calculate the average and standard deviation of the annual inflation over this period (2 marks).

Hints:

https://www150.statcan.gc.ca/n1/daily-quotidien/240116/dq240116a-eng.htm https://www.cbc.ca/news/business/inflation-dec-2023-1.7084981

https://www.reuters.com/markets/canadas-inflation-rises-34-dec-meeting-expectations-2024-01-16/

4b. Stock Returns (1971 - 2023): In a different worksheet of the same workbook, calculate the monthly returns for S&P/TSX Composite using the closing values. (The change should be calculated as the value in month t minus the value in month (t-1) and then divided by the value in month (t-1) to find the monthly returns). Calculate the mean and standard deviation for these monthly returns. Annualize the monthly average and standard deviation of returns.

(5 marks)

Submit a printout and a graph of monthly annual inflation (part a) and nominal TSE returns for the last 50 years (1973 – 2023) and  report their correlation.  How  does  high  inflation affect  nominal  (not  inflation-adjusted) TSE returns in the real world? (4 marks)

4c. Next, in a third worksheet, copy the data of CPI and TSE close. Calculate the real TSE close by dividing the nominal TSE close by the corresponding CPI. Then calculate the monthly TSE real return from January 1973 to December 1982 by looking at the percentage change of the real TSE close for these 10 years. Next, graph the TSE real return for these 10 years and report whether monthly real TSE returns are mostly positive or mostly negative. What does this tell you about the real return of investing in Canadian stocks in a period of high inflation? Submit the graph with your handwritten answer. (3 marks)

4d. You should work in a single excel file (workbook) having different worksheets as specified earlier for inflation and S&P/TSX composite data and real return calculation. Save your file as [LastName, FirstName Assignment1.xlsx]. Submit your Excel file to the required folder on eClass.

If you are confused with small things, say error in date/year, apply your own judgements. (5 marks)