FIN 390 Fixed Income Securities Analysis Full Course

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FIN 390 Fixed Income Securities Analysis Full Course

FIN 390 WEEK 1 FIXED-INCOME SECURITIES

Identify at least three different kinds of fixed-income securities and the pros and cons of each from both the firm’s perspective as well as the potential investor’s perspective.

FIN 390 WEEK 2 WHAT ARE RATIOS, AND WHY ARE THEY IMPORTANT?

When we do financial statement analysis, why do we need to study ratios? Why can’t we just look at dollars of sales, dollars of debt, or dollars of profit?

FIN 390 WEEK 3 WHAT ARE RISK AND PORTFOLIO DIVERSIFICATION?

Explain the concept of diversification in order to reduce investment risk.

FIN 390 WEEK 4 BOND VALUATION AND THE INFLUENCE OF INTEREST RATES ON BOND VALUE

Give two fixed-income security features that would have different attractiveness to different kinds of investors (e.g., private individual versus institutional investor).

FIN 390 WEEK 5 DURATION AND ACTIVE VERSUS PASSIVE PORTFOLIO MANAGEMENT

 Explain the concept of bond duration.

FIN 390 WEEK 6 INVESTORS AND THE INVESTMENT PROCESS

 Pick one of the three major bond indexes, and do some Internet research to identify the performance of the index during the last 24 months and any possible explanations for that performance.

FIN 390 WEEK 7 INVESTMENTS BACKGROUND AND ISSUES

Describe the major steps in the construction of an investment portfolio.

FIN 390 Final Course Project Guidelines

Students should select a company that has issued bonds in the last 3 years so that the information sources can provide sufficient financial data for analysis. The selection is subject to faculty approval: the company choice should be posted as early as possible in the first week.

Post the following.

1.   Your company choice

2.   The security chosen

3.   When that security was issued

It’s suggested that you work on at least one of each of the remaining milestones each week.

The Final Project is made up of the separate sections for each milestone listed below. Each section should be a minimum of two pages (excluding charts, graphs, etc.).You will be submitting these milestones each week for weeks 1 through 6. You will revise these milestones and submit your Final Project in Week 7.

• Papers should be 15 or more written pages in length, 10-point font, and double spaced. The paper should include a cover page, table of contents, introduction, body of the report, summary or conclusion, and works cited, graphs, and tables. These items are not part of the total page count.
• Even though this is not a scientific-type writing assignment and is mostly creative in nature, references are still very important. At least six authoritative, outside references are required (anonymous authors or web pages are not acceptable). These should be listed on the last page titled “Works Cited.”
• Appropriate citations are required utilizing the APA standard.
• All DeVry University policies are in effect, including the plagiarism policy.
• Any questions about this paper may be discussed in the weekly discussion topic.
• This paper is worth 210 total points and will be graded on quality of research topic and paper information, use of citations, grammar, and sentence structure. See the grading rubric below.

Milestones and Final Project

• Milestone 1: Company Background: (20 points) This section should include what industry the firm is in, its products, its competitors, and the stated main reason for needing capital (to fund receivables, capacity expansion, retire older debt, etc.).
• Milestone 2: Balance Sheets: (20 points) What did the balance sheet look like in the quarter just prior to issuing the bonds? Include both a copy from before the issue and after the issue. Calculate at least five of the ratios shown in the Moody’s Bond Rating Chart contained in the Week 2 Lesson both before and after the bonds were issued, and discuss why you think they are important to your report.
• Milestone 3: Trends in YTM and Price: (20 points) At what price and YTM was the initial offering sold? Tabulate the price and YTM of the issue at the end of each calendar quarter for the last six quarters. Then, plot the tabulated values to visualize the trends in YTM and prices.
• Milestone 4: Purpose of the Offering and Leverage: (20 points) What was the planned use of the funds raised? If you can’t find a specific discussion about that, then use your judgment as to why you think the funds were needed and explain your reasoning. Calculate the financial leverage before and after the offering.
• Milestone 5: Rate of Return: (20 points) If you were one of the original investors in this issue and you had invested $10,000, what would your total return be if you sold the securities at today’s market price? Compute the duration of the bond and its convexity currently. Add a brief discussion about your calculations.
• Milestone 6: Comparisons: (20 points) Identify and compare pre-offering EPS and total equity $ to the most current values. Compute the firm’s current WACC assuming the total debt of the firm is in the issue that you analyzed. This means that if the company has more than one debt issue outstanding with a total face value of $X million and your chosen issue involves $Y million, then assume that all $X million is in your issue. This will simplify the calculations without diminishing learning value. Discuss at least three overall conclusions about this offering as a result of your research.
• Final Project:(210 points) Organize your project with a title page, table of contents, and reference list. Please construct a comprehensive introduction that lays out your project. In your conclusion, please recap your analysis so that a reader can draw upon your expertise in order to make an educated investment decision. This is the section to draw together all that you have researched and analyzed. Assemble and revise, if necessary, all of your milestone work to incorporate into the Final Project. The chapters should flow from one to another to ensure continuity. The reader should gain valuable information and conclusions from your work. After this section, please give your opinion about the value of this project to your overall learning experience in this course. Constructive comments, both positive and negative, are appreciated. Discuss at least two characteristics about this project that enhanced your learning experience. Please edit your report so that it is something that makes you proud.

Milestone Grading Rubrics

Fixed-Income Security Milestone Rubrics

Week	Points	Full Credit	3/4 Credit	1/2 Credit	1/4 Credit
1	20	Thorough description with all requirements	All elements included, but lacks some depth; clear reason for funding	Some elements included, but lacks depth; unclear reason for funding	Minimal description; most elements missing; no reason for funding
2	20	Pre and post balance sheets; pre and post D/E and ROE ratios	Balance sheets included; three-fourths ratios shown	Balance sheet included; only half the ratios shown	Missing one or more balance sheet(s); no ROE shown
3	20	Trends in YTM and price	All included, except 18-month trend incomplete	Partial trends included	No indication of the trends
4	20	Found and commented on purpose of the offering; computed financial leverage before and after offering	Found purpose of offering and leverage, but incomplete	Purpose or leverage missing	Some information provided without explanation
5	20	Computed total return, duration, and convexity, and discussed	All calculations shown, interest or dividends shown, but TVM improperly applied	Calculations shown and TVM applied improperly	TVM not used to calculate total return; no calculations shown
6	20	Compared EPS, total equity preoffering to most current; computed WACC and discussed your thoughts about them	Three conclusions reached, but with weak justifications; EPS and ROE determined	Conclusions shown but without justification; calculations incomplete	No conclusions or calculations shown
Total Points 120

Final Project Grading Rubric

Week	Points	Full Credit	3/4 Credit	1/2 Credit	1/4 Credit
1	25	Thorough description with all requirements	All elements included, but lacks some depth; clear reason for funding	Some elements included, but lacks depth; unclear reason for funding	Minimal description; most elements missing; no reason for funding
2	25	Pre and post balance sheets; pre and post D/E and ROE ratios	Balance sheets included; three fourths ratios shown	Balance sheet included; only half the ratios shown	Missing one or more balance sheet(s); no ROE shown
3	25	Trends in YTM and price	All included, except 18-month trend incomplete	Partial trends included	No indication of the trends
4	25	Found and commented on purpose of the offering; computed financial leverage before and after offering	Found purpose of offering and leverage, but incomplete	Purpose or leverage missing	Some information provided without explanation
5	25	Computed total return, duration, and convexity, and discussed	All calculations shown, interest or dividends shown, but TVM improperly applied	Calculations shown and TVM applied improperly	TVM not used to calculate total return; no calculations shown
6	25	Compared EPS, total equity preoffering to most current; computed WACC and discussed your thoughts about them	Three conclusions reached, but with weak justifications EPS and ROE determined	Conclusions shown but without justification; calculations incomplete	No conclusions or calculations shown
7	60	All six milestone projects are scholarly melded into a comprehensive document. All references are cited within the work: the discussion is grammatically sound. The introduction, conclusion, and student review are thorough, analytical, and perfected. A recommendation and justification is thoughtful and reasonable. The reader has valuable insight into the company and its potential. The document is well organized and flows smoothly from section to section.	Milestones are assembled and tied together. There are very few citation errors. There are some minor grammatical errors. The introduction and conclusion are informative but do not present a comprehensive picture of the organization. The recommendation and justification is present, but not briefly discussed. The reader does benefit from the analysis, but it is not complete. The document sections flow somewhat transparently from section to section.	Most of the milestones have been revised and assembled into the document, and there are some continuity errors. There are some citation errors and grammatical errors. Introduction and conclusion are brief and not comprehensive. The construction does not meet requirements. The recommendation and justification are weak and require more thought. The reader obtains some information from the research.	Milestone work is just assembled and not tied together; no continuity. There are many citations and multiple grammatical errors. Introduction and conclusion are brief and do not contain much information. The recommendation and justification are not present.The reader does not gain much value from this document. The sections do not appear to be connected; they are just copied from the milestones.
Total Points 210

FIN 390 WEEK 6 QUIZ

Question 15 pts

(TCO 7) What is the primary risk that a bondholder faces?

	Risk of the issuing firm declaring bankruptcy
	A downturn in the economy causing the firm to lose money

	Interest rate risk
	None of the above

Question 25 pts

(TCO 7) To calculate a bond’s duration, you must

	average the present values of all the coupon payments.
	take a weighted average of the present values of all the cash inflows.

	divide the face value by the PV of the coupon annuity.
	None of the above

Question 35 pts

(TCO 7) Cash flow matching isn’t the ideal solution to reduce bond portfolio interest rate risk because

	some firms can’t afford to buy the extra zero-coupon bonds.
	the Federal Reserve may raise interest rates beyond the coupon rate.

	this strategy puts constraints on the bonds that the investor may wish to buy.
	None of the above

Question 45 pts

(TCO 7) Why do investors like convexity?

	Because the potential price drop is greater than price gain when yields rise
	Because the bonds displaying it are usually priced at a premium

	Because they have more potential upside than potential downside
	None of the above

Question 55 pts

(TCO 7) Passive bond managers prefer to

	manage the prices of the bonds in their portfolios.
	manage only the interest rate risk of their fixed-income securities.

	Both of the above
	None of the above

Question 65 pts

(TCO 9) Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years?

	Callable feature
	Convertible feature

	Subordination clause
	Sinking fund

Question 75 pts

(TCO 9) Bonds issued in the United States are _____, and most bonds issued overseas are

	bearer bonds; registered.
	Registered bonds; bearer bonds.

	the covariance of the risk-free rate; the rate of inflation.
	None of the above

Question 85 pts

(TCO 9) A convertible bond has a par value of $1,000 but its current market price is $950. The current price of the issuing company’s stock is $19, and the conversion ratio is 40 shares. The bond’s conversion premium is

	$50.00.
	$190.00.

	$200.00.
	$240.00.

Question 95 pts

(TCO 7) Bond portfolio immunization techniques balance _____ and
_____ risk.

	price; reinvestment
	price; liquidity

	credit; reinvestment
	credit; liquidity

Question 105 pts

(TCO 5) A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be _____ if its yield is 9%.

	7
	9

	9.39
	12.11

Question 115 pts

(TCO 7) A company has current assets of: cash $500, accounts receivable $200, and inventory $400. The company also has current liabilities of: accounts payable $300 and notes payable $600. What is the company’s quick ratio?

	.78
	.88

	.90
	.55

Question 125 pts

(TCO 7) You earn 6% on your corporate bond portfolio this year, and you are in a 25% federal tax bracket and an 8% state tax bracket. Your after tax return is _____. (Assume that federal taxes are not deductible against state taxes and vice versa.)

	4.5%
	4.14%

	4.02%
	3.12%

FIN 390 WEEK 8 FINAL EXAM

Question 110 pts

(TCO 1) Which of the following is true about fixed-income securities?

They are usually found on the income statement.

They are always found on the left side of the balance sheet.

They are usually shown on the right side of the balance sheet.

None of the above

Question 210 pts

(TCO 2) The concept of risk versus return refers to

the consideration of an investor’s portfolio weights being equal between risk-free and risky assets.

the fact that the yield curve is flat.

the fact that all investors expect less return for increasing amounts of risk.

None of the above

Question 310 pts

(TCO 5) Which of the following is not true?

YTM is always higher than the coupon rate.

Coupon rate will always exceed the dividend yield.

YTM is primarily of interest to investment bankers.

All of the above

Question 410 pts

(TCO 3) Which of the following are or could be part of the buying, selling, and trading of corporate bonds?

IPO process and shelf registration

Auction markets and dealer markets

Investment bankers

All of the above

Question 510 pts

(TCO 5) What is the normal yield curve shape?

Humped in the middle

Downward sloping to the right

Upward sloping to the right

None of the above

(TCO 6) Portfolio diversification is all about which of the following?

Maximizing the investor’s return

Minimizing the risk to the investor

Maximizing the return per unit of risk to the investor

None of the above

Question 710 pts

(TCOs 1 and 8) What kind of securities would investors seeking a steady income probably look to?

Common stock, Treasury bills, and corporate bonds

Preferred stock, Treasury bonds, and corporate bonds

Corporate bonds rated “bbb” only

None of the above

Question 810 pts

(TCO 8) Who would normally be required to create a portfolio investment policy?

Pension fund managers

401k plan administrators

Large insurance companies

All of the above

(TCO 4) Where could you find trend information about the bond market?

Dow Jones Average

NASDAQ

S&P 500

None of the above

Question 1010 pts

(TCO 6) The yield on a corporate bond is 10%, and it is currently selling at par. The marginal tax rate is 20%. A par value municipal bond with a coupon rate of 8.50% is available. Which security is a better buy?

Municipal bond

Both are equal

Corporate bond

A municipal bond carries no par

Question 1120 pts

(TCO 6) What is the coupon rate needed on a $1,000 face value, 6% coupon corporate bond to make it equivalent in terms of return to one whose interest rate is tax free? Assume the corporate tax rate is 40%.

Question 1220 pts

(TCO 7) What would be the expected change to a 30-year bond’s market price or value if its YTM increases to 9.4%? Its YTM is now 9%, it has an 8% annual coupon, $1,000 face value, it is currently priced at $897.26, and its duration is 8 years.

Question 1320 pts

(TCO 2) Given the data below, calculate the expected return, variance, and standard deviation of the following company. In a recessionary economy, which is expected to occur with a 30% probability, the expected returns would be -5%.
In an expanding economy with an expected probability of occurrence of 20%, the expected return would be 20%.
In a normal economy, expected to occur 50% of the time, the expected return would be 5%.

Question 1420 pts

(TCO 6) Calculate the five ratios for the following company info.
Income Statement                                     Balance Sheet
Revenue           10,000                                   Assets                              Liab. + OE

EBIT                   $2,000                         cash       $1,000    a/p                           $2,000

Interest              $500                           A/R       $10,000    Bonds payable    $50,000

Earnings B4 Tax $1,500                     Equip     $25,000    equity                   $84,000

EAT (at 30%)       $1,050                     Bldg    $100,000

Total   $136,000                                $136,000
– return on sales
– ROA
– ROE
– fixed asset turnover
– times interest earned

Question 1520 pts

(TCOs 1, 5, and 6) Calculate the appropriate selling price of a 30-year 5% coupon, $10,000 Treasury bond that was purchased 5 years ago. Marketplace interest rates are averaging 8%.

Question 1620 pts

(TCOs 1, 8, and 9) An investor is looking to buy a bond that currently pays $155 a year in interest (coupon rate). The current yield is 11%, and the face value is $1,000. How much will the investor have to pay for this bond?

Question 1730 pts

(TCO 5) Explain the difference between active portfolio management and passive management.

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