Yield Curve Essay Example | Topics and Well Written Essays - 1000 words

Yield Curve - Essay Example If we compare the price movement of the stock with that of the S&P 500, NASDAQ and Dow Jones Industrial Average, we see a positive correlation between the stock price and the three indices. The stock prices have moved with the market in the past one year. But on the other hand, the stock price movements have been less vigorous than the three indices, which mean that the stock is not as volatile as the market. In absolute terms the sales and profitability of the firm has increased in the past 3 years. The sales have grown at a rate of 2.15% in the past three years. The profitability of the firm has grown at a rate of 10.67% in the past three years. The profit margin has also seen an increase in the past three years. It was 3.31% in 2009, 3.52% in 2010 and 3.89% in 2011. The trailing profit margin is also following this trend with a margin of 3.87% for the quarter ending July 31, 2011. According to upgrades and downgrades history, the stock was downgraded on February 10, 2011 to neutra l from buy. But analysts after that have estimated a mean price target of $60.10, which is approximately $7 above the current price. Analysts’ estimates show that the sales will show a growth at the end of this year and the next one. The analysts also expect that the EPS will also show a growth. The analysts have estimated the Wal-Mart will grow at 10.41% per annum over the next five years and the industry will grow at 14.82% per annum. The analysts recommend buying to holding on to the stock with a mean recommendation of 2.2. Part 2 Complete the following table:   Business Date Chosen Five Years Ago 30/08/2006 1-month Nominal T-bill Rate on that Date 5.16   3-month Nominal T-bill Rate on that Date 5.05 6-month Nominal T-bill Rate on that Date 5.14 1-year Nominal T-bill Rate on that Date 5.06 5-year Nominal T-bill Rate on that Date 4.72 10-year Nominal T-bond Rate on that Date 4.76 20-year Nominal T-bond Rate on that Date 4.98 30-year Nominal T-bond Rate on that Date 4.91 1. The yield curve is almost inverted on this date. This is because the trend that can be inferred from the graph is that the long-term debt instruments have a lower yield than the short-term instruments. Inverted yield curves have been an accurate forecasting tool for recessions. This type of a yield curve shows that the future interest rates will be lower because of which there is an increase in the demand for long-term bonds. And as a result the yields fall for the long-term bonds. 2. 10- Year Bond Purchased for $1000 5 Years Ago   Original Value $1000   Coupon Rate 4.79 Current 5-Year Yield to Maturity 0.98 Number of Semi-Annual Periods 10 Current 5-Year Yield to Maturity/2 0.49 Current Value $1,185.47 Gain or Loss on the Bond over the 5 years $185.47 20- Year Bond Purchased for $1000 5 Years Ago   Original Value $1000   Coupon Rate   5.00 Current 15-Year Yield to Maturity (est.) 2.70 Number of Semi-Annual Periods 30 Current 15-Year Yield to Maturity (est.)/2 1.35 Cur rent Value $1,282.14 Gain or Loss on the Bond over the 5 years $282.14 The gain for the 20 year bond is greater than the gain on the 10 year bond. It is because the value of the 20 year bond is higher than the 10 year bond. Both the bonds will be sold at a premium because the coupon rate is higher than the YTM for both bonds. The only difference is that the 20 year bond has a longer time to maturity because of which its value is higher. -----------------------------------Please Leave a Positive Feedback------------------------------------- Works Cited Brigham, E. F., & Ehrhardt, M. C. (2005). Financial Management: Theory and Practice. USA: South-Western Cengage