Practice Questions for Midterm II

Size: px
Start display at page:

Download "Practice Questions for Midterm II"

Transcription

1 Finance 333 Investments Practice Questions for Midterm II Winter 2004 Professor Yan 1. The market portfolio has a beta of a. 0. *b. 1. c. -1. d By definition, the beta of the market portfolio is The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal to a b c *d e E(R) = 6% + 1.2(12-6) = 13.2%. 3. According to the Capital Asset Pricing Model (CAPM), fairly priced securities a. have positive betas. *b. have zero alphas. c. have negative betas. d. have positive alphas.. A zero alpha results when the security is in equilibrium (fairly priced for the level of risk). 4. According to the Capital Asset Pricing Model (CAPM), a. a security with a positive alpha is considered overpriced. b. a security with a zero alpha is considered to be a good buy. c. a security with a negative alpha is considered to be a good buy. *d. a security with a positive alpha is consider to be underpriced.. A security with a positive alpha is one that is expected to yield an abnormal rate of return, based on the perceived risk of the security, and thus is underpriced. 5. Security X has an expected rate of return of 0.11 and a beta of 1.5. The risk-free rate is 0.05 and the market expected rate of return is According to the Capital Asset Pricing Model, this security is a. underpriced. b. overpriced. *c. fairly priced.

2 d. cannot be determined from data provided.. 11% = 5% + 1.5(9% - 5%) = 11.0%; therefore, the security is fairly priced. 6. What is the expected return of a zero-beta security? a. The market rate of return. b. Zero rate of return. c. A negative rate of return. *d. The risk-free rate. e. None of the above. E(R S ) = r f + 0(R M - r f ) = r f. 7. A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be if the coupon rate is 7%. a. $ b. $ c. $1, *d. $ e. $1, FV = 1000, PMT = 70, n = 5, i = 10, PV = A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be if the coupon rate is 8%. *a. $ b. $ c. $1, d. $1, FV = 1000, PMT = 40, n = 10, i = 5, PV = A coupon bond that pays interest of $100 annually has a par value of $1,000, matures in 5 years, and is selling today at a $72 discount from par value. The yield to maturity on this bond is. a. 6.00% b. 8.33% *c % d % FV = 1000, PMT = 100, n = 5, PV = -928, i = % 10. You purchased an annual interest coupon bond one year ago that had 6 years remaining to maturity at that time. The coupon interest rate was 10% and the par value was $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first

3 interest payment and the yield to maturity continued to be 8%, your annual total rate of return on holding the bond for that year would have been. a. 7.00% b. 7.82% *c. 8.00% d % FV = 1000, PMT = 100, n = 6, i = 8, PV = FV = 1000, PMT = 100, n = 5, i = 8, PV = HPR = ( ) / = 8% 11. A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a coupon rate of 10%, and has a yield to maturity of 12%. The current yield on this bond is. a. 9.39% b % *c % d % FV = 1000, n = 4, PMT = 100, i = 12, PV= $100 / $ = 10.65%. 12. A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000. If the bond matures in 8 years, the bond should sell for a price of today. a *b. $ c. $ d. $ $1,000/(1.09) 8 = $ The yield to maturity on a bond is. a. below the coupon rate when the bond sells at a discount, and equal to the coupon rate when the bond sells at a premium. *b. the discount rate that will set the present value of the payments equal to the bond price. c. based on the assumption that any payments received are reinvested at the coupon rate. d. none of the above. e. a, b, and c. The reverse of a is true; for c to be true payments must be reinvested at the yield to maturity. 14. A bond will sell at a discount when. a. the coupon rate is greater than the current yield and the current yield is greater than yield to maturity b. the coupon rate is greater than yield to maturity c. the coupon rate is less than the current yield and the current yield is greater than the yield to maturity

4 *d. the coupon rate is less than the current yield and the current yield is less than yield to maturity are true. In order for the investor to earn more than the current yield the bond must be selling for a discount. Yield to maturity will be greater than current yield as investor will have purchased the bond at discount and will be receiving the coupon payments over the life of the bond. 15. Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now the price of this bond will be. a. higher *b. lower c. the same d. cannot be determined e. $1,000 This bond is a premium bond as interest rates have declined since the bond was issued. If interest rates remain constant, the price of a premium bond declines as the bond approaches maturity. 16. A 1% decline in yield will have the greatest effect on the price of the bond with a a. 10-year maturity, selling at 80 b. 10-year maturity, selling at 100 *c. 20-year maturity, selling at 80 d. 20-year maturity, selling at 100 e. all bonds will be affected equally The longer the maturity the more an interest rate changes the price of the bond. Bonds selling at discount are affected more than bonds selling at par. 17. Using semiannual compounding, a 15-year zero coupon bond that has a par value of $1,000 and a required return of 8% would be priced at. *a. 308 b. $315 c. $464 d. $555 FV = 1000, n = 30, I = 4, PV = The yield curve shows at any point in time: a. The relationship between the yield on a bond and the duration of the bond. b. the relationship between the coupon rate on a bond and time to maturity of the bond. *c. The relationship between yield on a bond and the time to maturity on the bond. d. All of the above. e. None of the above. Use the following information to answer questions 19 through 21. Suppose that all investors expect that interest rates for the 4 years will be as follows:

5 Year Forward Interest Rate 0 (today) 5% 1 7% 2 9% 3 10% 19. What is the price of 3-year zero coupon bond with a par value of $1,000? a. $ *b. $ c. $ d. $ $1,000 ) (1.05)(1.07)(1.09) = $ What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000) a. $1, b. $1, c. $1, *d. $1, [(1.05)(1.07)] 1/2-1 = 6%. FV = 1000, n = 2, PMT = 100, i = 6, PV = $1, What is the yield to maturity of a 3-year zero coupon bond? a. 7.00% b. 9.00% *c. 6.99% d. 7.49% [(1.05)(1.07)(1.09)] 1/3-1 = Use the following information to answer question 22. Given the following pattern of forward rates: Year Forward Rate 1 5% 2 6% 3 6.5% 22. If one year from now the term structure of interest rates changes so that it looks exactly the same as it does today, what would be your holding period return if you purchased a 3-year zero coupon bond today and held it for one year? a. 6% *b. 8% c. 9% d. 7%

6 $1,000 / (1.06)(1.065) = $ (selling price) $1,000 / (1.05)(1.06)(1.065) = $ (purchase price) ($ $843.64) / $ = 5% 23. Given the time to maturity, the duration of a zero coupon bond is higher when the discount rate is a. higher. b. lower. c. equal to the risk free rate. *d. independent of the discount rate.. The duration of a zero coupon bond is equal to the maturity of the bond. 24. Which of the following two bonds is more price sensitive to changes in interest rates? 1. A par value bond, X, with a 5-year-to-maturity and a 10% coupon rate. 2. A zero coupon bond, Y, with a 5-year-to-maturity and a 10% yield-to-maturity. a. Bond X because of the higher yield to maturity. b. Bond X because of the longer time to maturity. *c. Bond Y because of the longer duration. d. Both have the same sensitivity because both have the same yield to maturity. e. None of the above Duration is the best measure of bond price sensitivity; the longer the duration the higher the price sensitivity. 25. Which of the following is not true? a. Holding other things constant, the duration of a bond increases with time to maturity. *b. Given time to maturity, the duration of a zero coupon decreases with yield to maturity. c. Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower. d. Duration is a better measure of price sensitivity to interest rate changes than is time to maturity. e. All of the above. The duration of a zero coupon bond is equal to time to maturity, and is independent of yield to maturity. 26. Par value bond XYZ has a modified duration of 6. Which one of the following statements regarding the bond is true? *a. If the market yield increases by 1% the bond's price will decrease by $60. b. If the market yield increases by 1% the bond's price will increase by $50. c. If the market yield increases by 1% the bond's price will decrease by $50. d. If the market yield decreases by 1% the bond's price will increase by $60. e. None of the above. P/P = -D* y -$60 = -6(0.01) X $1, Which of the following bonds has the longest duration?

7 a. An 8-year maturity, 0% coupon bond. b. An 8-year maturity, 5% coupon bond. c. A 10-year maturity, 5% coupon bond. *d. A 10-year maturity, 0% coupon bond. e. Cannot tell from the information given. The longer the maturity and the lower the coupon, the greater the duration 28. Which one of the following par value 12% coupon bonds experiences a price change of $23 when the market yield changes by 50 basis points? a. The bond with a duration of 6 years. b. The bond with a duration of 5 years. c. The bond with a duration of 2.7 years. *d. The bond with a duration of 5.15 years. e. None of the above. P/P = -D X [ (1+y) / (1+y)]; = -D X [.005 / 1.12]; D = An 8%, 15-year bond has a yield to maturity of 10% and a duration of 8.05 years. If the market yield changes by 25 basis points, how much change will there be in the bond's price? *a. 1.85% b. 2.01% c. 3.27% d. 6.44% P/P = (-8.05 X )/1.1 = 1.85% 30. Each of two stocks, A and B, are expected to pay a dividend of $5 in the upcoming year. The expected growth rate of dividends is 10% for both stocks. You require a rate of return of 11% on stock A and a return of 20% on stock B. The intrinsic value of stock A. *a. will be greater than the intrinsic value of stock B b. will be the same as the intrinsic value of stock B c. will be less than the intrinsic value of stock B d. cannot be calculated without knowing the market rate of return. d. none of the above are true. PV 0 = D 1 /(k-g); given that dividends are equal, the stock with the larger required return will have the lower value. Use the following information to answer questions Dominion Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Analysts expect the price of Dominion Tool Company shares to be $22 a year from now. The beta of Dominion Tool Company's stock is The market s required rate of return on Dominion s stock is. a. 14.0% b. 17.5%

8 *c. 16.5% d % 4% (14% - 4%) = 16.5%. 32. What is the intrinsic value of Dominion s stock today? *a. $20.60 b. $20.00 c. $12.12 d. $22.00 k = ( ) ; k = = (22 P + 2) / P.165P = 24 P 1.165P = 24 ; P = If Dominion s intrinsic value is $21.00 today, what must be its growth rate? a. 0.0% b. 10% c. 4% d. 6% *e. 7% k = ( ) ; k = = 2/21 + g; g =.07 Use the following information for questions Civil Engineering Corporation is expected to pay a dividend of $1.00 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 13%. The stock of Civil Engineering Corporation has a beta of What is the return you should require on Civil Engineering s stock? a. 12.0% *b. 14.6% c. 15.6% d. 20% 5% + 1.2(13% - 5%) = 14.6%. 35. What is the intrinsic value of Civil Engineering s stock? a. $14.29 b. $14.60 c. $12.33 *d. $11.62

9 k = 5% + 1.2(13% - 5%) = 14.6% P = 1 / ( ) = $ High Fly Airline is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of High Fly Airline has a beta of The return you should require on the stock is. a. 10% b. 18% *c. 30% d. 42% 6% + 3(14% - 6%) = 30%. 37. High Fly Airline is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of High Fly Airline has a beta of The intrinsic value of the stock is. *a. $46.67 b. $50.00 c. $56.00 d. $ % + 3(14% - 6%) = 30%; P = 7 / ( ) = $ Sunshine Corporation is expected to pay a dividend of $1.50 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of Sunshine Corporation has a beta of The intrinsic value of the stock is. a. $10.71 b. $15.00 c. $17.75 *d. $ % (14% - 6%) = 12%; P = 1.50 / ( ) = $ Mature Products Corporation produces goods that are very mature in their product life cycles. Mature Products Corporation is expected to pay a dividend in year 1 of $2.00, a dividend of $1.50 in year 2, and a dividend of $1.00 in year 3. After year 3, dividends are expected to decline at a rate of 1% per year. An appropriate required rate of return for the stock is 10%. The stock should be worth a. $9.00 *b. $10.57 c. $20.00 d. $22.22

10 Yr. Div. PV of 10% 1 $2.00 $2.00/1.10 = $ $1.50 $1.50/(1.10) 2 = $ $1.00 $1.00/(1.10) 3 = $0.75 $3.81 P 3 = 1.00 (.99) / [.10 (-.01)] = $9.00 PV of P 3 = $9/(1.10) 3 = $6.76; P O = $ $3.81 = $ Assume that at the end of the next year, Company A will pay a $2.00 dividend per share, an increase from the current dividend of $1.50 per share. After that, the dividend is expected to increase at a constant rate of 5%. If you require a 12% return on the stock, the value of the stock is. *a. $28.57 b. $28.79 c. $30.00 d. $31.78 P 1 = 2 (1.05) / ( ) = $30.00 PV of P 1 = $30/1.12 = $26.78; PV of D 1 = 2/1.12 = 1.79 P O = $ $1.79 = $28.57.

VALUATION OF DEBT CONTRACTS AND THEIR PRICE VOLATILITY CHARACTERISTICS QUESTIONS See answers below

VALUATION OF DEBT CONTRACTS AND THEIR PRICE VOLATILITY CHARACTERISTICS QUESTIONS See answers below VALUATION OF DEBT CONTRACTS AND THEIR PRICE VOLATILITY CHARACTERISTICS QUESTIONS See answers below 1. Determine the value of the following risk-free debt instrument, which promises to make the respective

More information

A) 1.8% B) 1.9% C) 2.0% D) 2.1% E) 2.2%

A) 1.8% B) 1.9% C) 2.0% D) 2.1% E) 2.2% 1 Exam FM Questions Practice Exam 1 1. Consider the following yield curve: Year Spot Rate 1 5.5% 2 5.0% 3 5.0% 4 4.5% 5 4.0% Find the four year forward rate. A) 1.8% B) 1.9% C) 2.0% D) 2.1% E) 2.2% 2.

More information

Fixed Income: Practice Problems with Solutions

Fixed Income: Practice Problems with Solutions Fixed Income: Practice Problems with Solutions Directions: Unless otherwise stated, assume semi-annual payment on bonds.. A 6.0 percent bond matures in exactly 8 years and has a par value of 000 dollars.

More information

Practice Set #2 and Solutions.

Practice Set #2 and Solutions. FIN-672 Securities Analysis & Portfolio Management Professor Michel A. Robe Practice Set #2 and Solutions. What to do with this practice set? To help MBA students prepare for the assignment and the exams,

More information

Rate of Return. Reading: Veronesi, Chapter 7. Investment over a Holding Period

Rate of Return. Reading: Veronesi, Chapter 7. Investment over a Holding Period Rate of Return Reading: Veronesi, Chapter 7 Investment over a Holding Period Consider an investment in any asset over a holding period from time 0 to time T. Suppose the amount invested at time 0 is P

More information

SAMPLE MID-TERM QUESTIONS

SAMPLE MID-TERM QUESTIONS SAMPLE MID-TERM QUESTIONS William L. Silber HOW TO PREPARE FOR THE MID- TERM: 1. Study in a group 2. Review the concept questions in the Before and After book 3. When you review the questions listed below,

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES 1. Expectations hypothesis. The yields on long-term bonds are geometric averages of present and expected future short rates. An upward sloping curve is

More information

Chapter 8. Step 2: Find prices of the bonds today: n i PV FV PMT Result Coupon = 4% 29.5 5? 100 4 84.74 Zero coupon 29.5 5? 100 0 23.

Chapter 8. Step 2: Find prices of the bonds today: n i PV FV PMT Result Coupon = 4% 29.5 5? 100 4 84.74 Zero coupon 29.5 5? 100 0 23. Chapter 8 Bond Valuation with a Flat Term Structure 1. Suppose you want to know the price of a 10-year 7% coupon Treasury bond that pays interest annually. a. You have been told that the yield to maturity

More information

Bonds, Preferred Stock, and Common Stock

Bonds, Preferred Stock, and Common Stock Bonds, Preferred Stock, and Common Stock I. Bonds 1. An investor has a required rate of return of 4% on a 1-year discount bond with a $100 face value. What is the most the investor would pay for 2. An

More information

TIME VALUE OF MONEY PROBLEM #5: ZERO COUPON BOND

TIME VALUE OF MONEY PROBLEM #5: ZERO COUPON BOND TIME VALUE OF MONEY PROBLEM #5: ZERO COUPON BOND Professor Peter Harris Mathematics by Dr. Sharon Petrushka Introduction This assignment will focus on using the TI - 83 to calculate the price of a Zero

More information

FIN 3710. Final (Practice) Exam 05/23/06

FIN 3710. Final (Practice) Exam 05/23/06 FIN 3710 Investment Analysis Spring 2006 Zicklin School of Business Baruch College Professor Rui Yao FIN 3710 Final (Practice) Exam 05/23/06 NAME: (Please print your name here) PLEDGE: (Sign your name

More information

Bond Valuation. What is a bond?

Bond Valuation. What is a bond? Lecture: III 1 What is a bond? Bond Valuation When a corporation wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities called bonds. A bond

More information

FINC 3630: Advanced Business Finance Additional Practice Problems

FINC 3630: Advanced Business Finance Additional Practice Problems FINC 3630: Advanced Business Finance Additional Practice Problems Accounting For Financial Management 1. Calculate free cash flow for Home Depot for the fiscal year-ended February 1, 2015 (the 2014 fiscal

More information

Investment Analysis (FIN 670) Fall Homework 3

Investment Analysis (FIN 670) Fall Homework 3 Investment Analysis (FIN 670) Fall 2009 Homework 3 Instructions: please read carefully You should show your work how to get the answer for each calculation question to get full credit You should make 2

More information

Chapter 7 Risk, Return, and the Capital Asset Pricing Model

Chapter 7 Risk, Return, and the Capital Asset Pricing Model Chapter 7 Risk, Return, and the Capital Asset Pricing Model MULTIPLE CHOICE 1. Suppose Sarah can borrow and lend at the risk free-rate of 3%. Which of the following four risky portfolios should she hold

More information

SAMPLE FACT EXAM (You must score 70% to successfully clear FACT)

SAMPLE FACT EXAM (You must score 70% to successfully clear FACT) SAMPLE FACT EXAM (You must score 70% to successfully clear FACT) 1. What is the present value (PV) of $100,000 received five years from now, assuming the interest rate is 8% per year? a. $600,000.00 b.

More information

TIME VALUE OF MONEY #6: TREASURY BOND. Professor Peter Harris Mathematics by Dr. Sharon Petrushka. Introduction

TIME VALUE OF MONEY #6: TREASURY BOND. Professor Peter Harris Mathematics by Dr. Sharon Petrushka. Introduction TIME VALUE OF MONEY #6: TREASURY BOND Professor Peter Harris Mathematics by Dr. Sharon Petrushka Introduction This problem assumes that you have mastered problems 1-5, which are prerequisites. In this

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES Chapter - The Term Structure of Interest Rates CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES CHAPTER : THE TERM STRUCTURE OF INTEREST RATES CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

More information

Review for Exam 2. Instructions: Please read carefully

Review for Exam 2. Instructions: Please read carefully Review for Exam 2 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems You are not responsible for any topics that are not covered in the lecture note

More information

Introduction to Bonds

Introduction to Bonds Bonds are a debt instrument, where the bond holder pays the issuer an initial sum of money known as the purchase price. In turn, the issuer pays the holder coupon payments (annuity), and a final sum (face

More information

Additional Practice Questions for Midterm I

Additional Practice Questions for Midterm I 1 Finance 333 Investments Additional Practice Questions for Midterm I Winter 2004 Professor Yan 1. Financial assets. A) directly contribute to the country's productive capacity *B) indirectly contribute

More information

Review for Exam 2. Instructions: Please read carefully

Review for Exam 2. Instructions: Please read carefully Review for Exam Instructions: Please read carefully The exam will have 1 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation questions.

More information

BUSINESS FINANCE (FIN 312) Spring 2008

BUSINESS FINANCE (FIN 312) Spring 2008 BUSINESS FINANCE (FIN 312) Spring 2008 Assignment 3 Instructions: please read carefully You can either do the assignment by yourself or work in a group of no more than two. You should show your work how

More information

2. What is your best estimate of what the price would be if the riskless interest rate was 9% (compounded semi-annually)? (1.04)

2. What is your best estimate of what the price would be if the riskless interest rate was 9% (compounded semi-annually)? (1.04) Lecture 4 1 Bond valuation Exercise 1. A Treasury bond has a coupon rate of 9%, a face value of $1000 and matures 10 years from today. For a treasury bond the interest on the bond is paid in semi-annual

More information

CHAPTER 14: BOND PRICES AND YIELDS

CHAPTER 14: BOND PRICES AND YIELDS CHAPTER 14: BOND PRICES AND YIELDS PROBLEM SETS 1. The bond callable at 105 should sell at a lower price because the call provision is more valuable to the firm. Therefore, its yield to maturity should

More information

Chapter 6 The Tradeoff Between Risk and Return

Chapter 6 The Tradeoff Between Risk and Return Chapter 6 The Tradeoff Between Risk and Return MULTIPLE CHOICE 1. Which of the following is an example of systematic risk? a. IBM posts lower than expected earnings. b. Intel announces record earnings.

More information

Click Here to Buy the Tutorial

Click Here to Buy the Tutorial FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin-534/fin-534-week-4-quiz-3- str/ For more course tutorials visit www.tutorialoutlet.com Which of the following

More information

FIN 3710. First (Practice) Midterm Exam 03/09/06

FIN 3710. First (Practice) Midterm Exam 03/09/06 FIN 3710 Investment Analysis Zicklin School of Business Baruch College Spring 2006 FIN 3710 First (Practice) Midterm Exam 03/09/06 NAME: (Please print your name here) PLEDGE: (Sign your name here) Instructions:

More information

Problem Set: Annuities and Perpetuities (Solutions Below)

Problem Set: Annuities and Perpetuities (Solutions Below) Problem Set: Annuities and Perpetuities (Solutions Below) 1. If you plan to save $300 annually for 10 years and the discount rate is 15%, what is the future value? 2. If you want to buy a boat in 6 years

More information

I. Readings and Suggested Practice Problems. II. Risks Associated with Default-Free Bonds

I. Readings and Suggested Practice Problems. II. Risks Associated with Default-Free Bonds Prof. Alex Shapiro Lecture Notes 13 Bond Portfolio Management I. Readings and Suggested Practice Problems II. Risks Associated with Default-Free Bonds III. Duration: Details and Examples IV. Immunization

More information

Lecture 15: Final Topics on CAPM

Lecture 15: Final Topics on CAPM Lecture 15: Final Topics on CAPM Final topics on estimating and using beta: the market risk premium putting it all together Final topics on CAPM: Examples of firm and market risk Shorting Stocks and other

More information

You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy?

You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy? 1 You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each

More information

The cost of capital. A reading prepared by Pamela Peterson Drake. 1. Introduction

The cost of capital. A reading prepared by Pamela Peterson Drake. 1. Introduction The cost of capital A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction... 1 2. Determining the proportions of each source of capital that will be raised... 3 3. Estimating the marginal

More information

FIN 432 Investment Analysis and Management Review Notes for Midterm Exam

FIN 432 Investment Analysis and Management Review Notes for Midterm Exam FIN 432 Investment Analysis and Management Review Notes for Midterm Exam Chapter 1 1. Investment vs. investments 2. Real assets vs. financial assets 3. Investment process Investment policy, asset allocation,

More information

Sample Problems Chapter 10

Sample Problems Chapter 10 Sample Problems Chapter 10 Title: Cost of Debt 1. Costly Corporation plans a new issue of bonds with a par value of $1,000, a maturity of 28 years, and an annual coupon rate of 16.0%. Flotation costs associated

More information

CHAPTER 14: BOND PRICES AND YIELDS

CHAPTER 14: BOND PRICES AND YIELDS CHAPTER 14: BOND PRICES AND YIELDS 1. a. Effective annual rate on 3-month T-bill: ( 100,000 97,645 )4 1 = 1.02412 4 1 =.10 or 10% b. Effective annual interest rate on coupon bond paying 5% semiannually:

More information

Review for Exam 1. Instructions: Please read carefully

Review for Exam 1. Instructions: Please read carefully Review for Exam 1 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

More information

Exam 1 Morning Session

Exam 1 Morning Session 91. A high yield bond fund states that through active management, the fund s return has outperformed an index of Treasury securities by 4% on average over the past five years. As a performance benchmark

More information

1. If the opportunity cost of capital is 14 percent, what is the net present value of the factory?

1. If the opportunity cost of capital is 14 percent, what is the net present value of the factory? MØA 155 - Fall 2011 PROBLEM SET: Hand in 1 Exercise 1. An investor buys a share for $100 and sells it five years later, at the end of the year, at the price of $120.23. Each year the stock pays dividends

More information

Chapter 6 Interest Rates and Bond Valuation

Chapter 6 Interest Rates and Bond Valuation Chapter 6 Interest Rates and Bond Valuation Solutions to Problems P6-1. P6-2. LG 1: Interest Rate Fundamentals: The Real Rate of Return Basic Real rate of return = 5.5% 2.0% = 3.5% LG 1: Real Rate of Interest

More information

Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator

Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator University of Stavanger (UiS) Stavanger Masters Program Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator The number in brackets is the weight for each problem. The weights

More information

Review for Exam 1. Instructions: Please read carefully

Review for Exam 1. Instructions: Please read carefully Review for Exam 1 Instructions: Please read carefully The exam will have 20 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

More information

Mathematics. Rosella Castellano. Rome, University of Tor Vergata

Mathematics. Rosella Castellano. Rome, University of Tor Vergata and Loans Mathematics Rome, University of Tor Vergata and Loans Future Value for Simple Interest Present Value for Simple Interest You deposit E. 1,000, called the principal or present value, into a savings

More information

Review for Exam 1. Instructions: Please read carefully

Review for Exam 1. Instructions: Please read carefully Review for Exam 1 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems covering chapter 1, 2, 3, 4, 14, 16. Questions in the multiple choice section will

More information

Financial Markets and Valuation - Tutorial 2: SOLUTIONS. Bonds, Stock Valuation & Capital Budgeting

Financial Markets and Valuation - Tutorial 2: SOLUTIONS. Bonds, Stock Valuation & Capital Budgeting Financial Markets and Valuation - Tutorial : SOLUTIONS Bonds, Stock Valuation & Capital Budgeting (*) denotes those problems to be covered in detail during the tutorial session Bonds Problem. (Ross, Westerfield

More information

Notes for Lecture 2 (February 7)

Notes for Lecture 2 (February 7) CONTINUOUS COMPOUNDING Invest $1 for one year at interest rate r. Annual compounding: you get $(1+r). Semi-annual compounding: you get $(1 + (r/2)) 2. Continuous compounding: you get $e r. Invest $1 for

More information

CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS

CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS 1 CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS (f) 1 The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries

More information

Take-Home Problem Set

Take-Home Problem Set Georgia State University Department of Finance MBA 8622 Fall 2001 MBA 8622: Corporation Finance Take-Home Problem Set Instructors: Lalitha Naveen, N. Daniel, C.Hodges, A. Mettler, R. Morin, M. Shrikhande,

More information

Spring 2012. True/False Indicate whether the statement is true or false.

Spring 2012. True/False Indicate whether the statement is true or false. Corporation Finance Spring 2012 Sample Exam 2B True/False Indicate whether the statement is true or false. 1. The total return on a share of stock refers to the dividend yield less any commissions paid

More information

Unit 01. 1. Return computation with cash purchase vs. margin purchase

Unit 01. 1. Return computation with cash purchase vs. margin purchase FCS 5510 Formula Sheet *Note: The formulas I expect you to know are colored in Red. They are either more conceptually based, or are more commonly used than the others. You need to have a passing familiarity

More information

Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates

Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates Cash Flow Financial transactions and investment opportunities are described by cash flows they generate. Cash flow: payment

More information

Chapter 6 APPENDIX B. The Yield Curve and the Law of One Price. Valuing a Coupon Bond with Zero-Coupon Prices

Chapter 6 APPENDIX B. The Yield Curve and the Law of One Price. Valuing a Coupon Bond with Zero-Coupon Prices 196 Part Interest Rates and Valuing Cash Flows Chapter 6 APPENDIX B The Yield Curve and the Law of One Price Thus far, we have focused on the relationship between the price of an individual bond and its

More information

Chapter 10 Risk and Capital Budgeting

Chapter 10 Risk and Capital Budgeting Chapter 10 Risk and Capital Budgeting MULTIPLE CHOICE 1. Operating leverage describes the relationship between... a. EBIT and sales b. taxes and sales c. debt and equity d. fixed costs and variable costs

More information

Chapter 5: Valuing Bonds

Chapter 5: Valuing Bonds FIN 302 Class Notes Chapter 5: Valuing Bonds What is a bond? A long-term debt instrument A contract where a borrower agrees to make interest and principal payments on specific dates Corporate Bond Quotations

More information

Chapter 4 Valuing Bonds

Chapter 4 Valuing Bonds Chapter 4 Valuing Bonds MULTIPLE CHOICE 1. A 15 year, 8%, $1000 face value bond is currently trading at $958. The yield to maturity of this bond must be a. less than 8%. b. equal to 8%. c. greater than

More information

Finance Homework Julian Vu May 28, 2008

Finance Homework Julian Vu May 28, 2008 Finance Homework Julian Vu May 28, 2008 Assignment: p. 28-29 Problems 1-1 and 1-2 p. 145-147 Questions 4-2, 4-3, and 4-4, and Problems 4-1, 4-2, 4-3, and 4-13 P1-1 A Treasury Bond that matures in 10 years

More information

AFM 271 Practice Problem Set #1 Spring 2005

AFM 271 Practice Problem Set #1 Spring 2005 AFM 271 Practice Problem Set #1 Spring 2005 1. Text problems: Chapter 1 1, 3, 4 Chapter 2 5 Chapter 3 2, 6, 7 Chapter 4 2, 6, 12, 14, 16, 18, 20, 22, 24, 26, 30, 32, 34, 38, 40, 46, 48 Chapter 5 2, 4,

More information

FI 302, Business Finance Exam 2, Fall 2000 versions 1 & 8 KEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEY

FI 302, Business Finance Exam 2, Fall 2000 versions 1 & 8 KEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEY FI 302, Business Finance Exam 2, Fall 2000 versions 1 & 8 KEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEY 1. (3 points) BS16 What is a 401k plan Most U.S. households single largest lifetime source of savings is

More information

Chapter 11. Bond Pricing - 1. Bond Valuation: Part I. Several Assumptions: To simplify the analysis, we make the following assumptions.

Chapter 11. Bond Pricing - 1. Bond Valuation: Part I. Several Assumptions: To simplify the analysis, we make the following assumptions. Bond Pricing - 1 Chapter 11 Several Assumptions: To simplify the analysis, we make the following assumptions. 1. The coupon payments are made every six months. 2. The next coupon payment for the bond is

More information

LOS 56.a: Explain steps in the bond valuation process.

LOS 56.a: Explain steps in the bond valuation process. The following is a review of the Analysis of Fixed Income Investments principles designed to address the learning outcome statements set forth by CFA Institute. This topic is also covered in: Introduction

More information

Chapter 6. Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams

Chapter 6. Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams Chapter 6 Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams 1. Distinguish between an ordinary annuity and an annuity due, and calculate present

More information

Bond valuation. Present value of a bond = present value of interest payments + present value of maturity value

Bond valuation. Present value of a bond = present value of interest payments + present value of maturity value Bond valuation A reading prepared by Pamela Peterson Drake O U T L I N E 1. Valuation of long-term debt securities 2. Issues 3. Summary 1. Valuation of long-term debt securities Debt securities are obligations

More information

FINANCIAL MATHEMATICS FIXED INCOME

FINANCIAL MATHEMATICS FIXED INCOME FINANCIAL MATHEMATICS FIXED INCOME 1. Converting from Money Market Basis to Bond Basis and vice versa 2 2. Calculating the Effective Interest Rate (Non-annual Payments)... 4 3. Conversion of Annual into

More information

Bond Valuation. Chapter 7. Example (coupon rate = r d ) Bonds, Bond Valuation, and Interest Rates. Valuing the cash flows

Bond Valuation. Chapter 7. Example (coupon rate = r d ) Bonds, Bond Valuation, and Interest Rates. Valuing the cash flows Bond Valuation Chapter 7 Bonds, Bond Valuation, and Interest Rates Valuing the cash flows (1) coupon payment (interest payment) = (coupon rate * principal) usually paid every 6 months (2) maturity value

More information

Homework 5 Solutions

Homework 5 Solutions Homework 5 Solutions Chapter 4C Investment Plans. Use the savings plan formula to answer the following questions. 30. You put $200 per month in an investment plan that pays an APR of 4.5%. How much money

More information

Finance 3130 Corporate Finiance Sample Final Exam Spring 2012

Finance 3130 Corporate Finiance Sample Final Exam Spring 2012 Finance 3130 Corporate Finiance Sample Final Exam Spring 2012 True/False Indicate whether the statement is true or falsewith A for true and B for false. 1. Interest paid by a corporation is a tax deduction

More information

CHAPTER 20. Financial Options. Chapter Synopsis

CHAPTER 20. Financial Options. Chapter Synopsis CHAPTER 20 Financial Options Chapter Synopsis 20.1 Option Basics A financial option gives its owner the right, but not the obligation, to buy or sell a financial asset at a fixed price on or until a specified

More information

2 The Mathematics. of Finance. Copyright Cengage Learning. All rights reserved.

2 The Mathematics. of Finance. Copyright Cengage Learning. All rights reserved. 2 The Mathematics of Finance Copyright Cengage Learning. All rights reserved. 2.3 Annuities, Loans, and Bonds Copyright Cengage Learning. All rights reserved. Annuities, Loans, and Bonds A typical defined-contribution

More information

Answers to Review Questions

Answers to Review Questions Answers to Review Questions 1. The real rate of interest is the rate that creates an equilibrium between the supply of savings and demand for investment funds. The nominal rate of interest is the actual

More information

Practice Set #1 and Solutions.

Practice Set #1 and Solutions. Bo Sjö 14-05-03 Practice Set #1 and Solutions. What to do with this practice set? Practice sets are handed out to help students master the material of the course and prepare for the final exam. These sets

More information

Exercise 1 for Time Value of Money

Exercise 1 for Time Value of Money Exercise 1 for Time Value of Money MULTIPLE CHOICE 1. Which of the following statements is CORRECT? a. A time line is not meaningful unless all cash flows occur annually. b. Time lines are useful for visualizing

More information

FNCE 301, Financial Management H Guy Williams, 2006

FNCE 301, Financial Management H Guy Williams, 2006 REVIEW We ve used the DCF method to find present value. We also know shortcut methods to solve these problems such as perpetuity present value = C/r. These tools allow us to value any cash flow including

More information

American Options and Callable Bonds

American Options and Callable Bonds American Options and Callable Bonds American Options Valuing an American Call on a Coupon Bond Valuing a Callable Bond Concepts and Buzzwords Interest Rate Sensitivity of a Callable Bond exercise policy

More information

Ing. Tomáš Rábek, PhD Department of finance

Ing. Tomáš Rábek, PhD Department of finance Ing. Tomáš Rábek, PhD Department of finance For financial managers to have a clear understanding of the time value of money and its impact on stock prices. These concepts are discussed in this lesson,

More information

Final Exam Spring 2003

Final Exam Spring 2003 15.433 Investments Final Exam Spring 2003 Name: Result: Total: 40 points: 40 Instructions: This test has 35 questions. You can use a calculator and a cheat sheet. Each question may have multiple parts

More information

Yield Measures, Spot Rates & Forward Rates

Yield Measures, Spot Rates & Forward Rates Fixed Income Yield Measures, Spot Rates & Forward Rates Reading - 57 www.proschoolonline.com/ 1 Sources of Return Coupon interest payment: Periodic coupon interest is paid on the par value of the bond

More information

Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk

Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk Bond Valuation 1 Topics in Chapter Key features of bonds Bond valuation Measuring yield Assessing risk 2 Determinants of Intrinsic Value: The Cost of Debt Net operating profit after taxes Free cash flow

More information

Exam 1 Sample Questions

Exam 1 Sample Questions Exam 1 Sample Questions 1. Asset allocation refers to. A. the allocation of the investment portfolio across broad asset classes B. the analysis of the value of securities C. the choice of specific assets

More information

3. You have been given this probability distribution for the holding period return for XYZ stock:

3. You have been given this probability distribution for the holding period return for XYZ stock: Fin 85 Sample Final Solution Name: Date: Part I ultiple Choice 1. Which of the following is true of the Dow Jones Industrial Average? A) It is a value-weighted average of 30 large industrial stocks. )

More information

CHAPTER 5 HOW TO VALUE STOCKS AND BONDS

CHAPTER 5 HOW TO VALUE STOCKS AND BONDS CHAPTER 5 HOW TO VALUE STOCKS AND BONDS Answers to Concepts Review and Critical Thinking Questions 1. Bond issuers look at outstanding bonds of similar maturity and risk. The yields on such bonds are used

More information

Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO) - First offering of stock to the general public.

Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO) - First offering of stock to the general public. Stock Valuation Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO) - First offering of stock to the general public. Seasoned Issue - Sale of new shares by a

More information

The Term Structure of Interest Rates CHAPTER 13

The Term Structure of Interest Rates CHAPTER 13 The Term Structure of Interest Rates CHAPTER 13 Chapter Summary Objective: To explore the pattern of interest rates for different-term assets. The term structure under certainty Forward rates Theories

More information

Math of Finance. Texas Association of Counties January 2014

Math of Finance. Texas Association of Counties January 2014 Math of Finance Texas Association of Counties January 2014 Money Market Securities Sample Treasury Bill Quote*: N Bid Ask Ask Yld 126 4.86 4.85 5.00 *(Yields do not reflect current market conditions) Bank

More information

Unit Return computation with cash purchase vs. margin purchase

Unit Return computation with cash purchase vs. margin purchase FCS 5510 Formula Sheet *Note: The formulas I expect you to know are colored in Red. They are either more conceptually based, or are more commonly used than the others. You need to have a passing familiarity

More information

Review for Exam 3. Instructions: Please read carefully

Review for Exam 3. Instructions: Please read carefully Review for Exam 3 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems. You are not responsible for any topics that are not covered in the lecture note

More information

Interest Rates and Bond Valuation

Interest Rates and Bond Valuation and Bond Valuation 1 Bonds Debt Instrument Bondholders are lending the corporation money for some stated period of time. Liquid Asset Corporate Bonds can be traded in the secondary market. Price at which

More information

Actual Returns. Large Long-Term Company Government Treasury Year Stocks Bonds Bills

Actual Returns. Large Long-Term Company Government Treasury Year Stocks Bonds Bills 408 PART FIVE Risk and Return 1. Risky assets, on average, earn a risk premium. There is a reward for bearing risk. 2. The greater the potential reward from a risky investment, the greater is the risk.

More information

Index. 1. Financial Markets: Overview. 2. The Bond Market. 3. Risks Associated with Fixed Income Investments. 4. Bond Characteristics and Valuation

Index. 1. Financial Markets: Overview. 2. The Bond Market. 3. Risks Associated with Fixed Income Investments. 4. Bond Characteristics and Valuation Index 1. Financial Markets: Overview 2. The Bond Market 3. Risks Associated with Fixed Income Investments 4. Bond Characteristics and Valuation 5. Macro Environment Chapter 24 Bond Characteristics and

More information

Investments Analysis

Investments Analysis Investments Analysis Last 2 Lectures: Fixed Income Securities Bond Prices and Yields Term Structure of Interest Rates This Lecture (#7): Fixed Income Securities Term Structure of Interest Rates Interest

More information

Chapter 6 Contents. Principles Used in Chapter 6 Principle 1: Money Has a Time Value.

Chapter 6 Contents. Principles Used in Chapter 6 Principle 1: Money Has a Time Value. Chapter 6 The Time Value of Money: Annuities and Other Topics Chapter 6 Contents Learning Objectives 1. Distinguish between an ordinary annuity and an annuity due, and calculate present and future values

More information

Q3: What is the quarterly equivalent of a continuous rate of 3%?

Q3: What is the quarterly equivalent of a continuous rate of 3%? SESSION 1: Pre-requisites: a reminder Time value of money, annuities Q1: You wish to buy a new house but would need to borrow part of the required amount. In view of your revenues you have been able to

More information

Bonds and the Term Structure of Interest Rates: Pricing, Yields, and (No) Arbitrage

Bonds and the Term Structure of Interest Rates: Pricing, Yields, and (No) Arbitrage Prof. Alex Shapiro Lecture Notes 12 Bonds and the Term Structure of Interest Rates: Pricing, Yields, and (No) Arbitrage I. Readings and Suggested Practice Problems II. Bonds Prices and Yields (Revisited)

More information

Practice Set #4 and Solutions.

Practice Set #4 and Solutions. FIN-469 Investments Analysis Professor Michel A. Robe Practice Set #4 and Solutions. What to do with this practice set? To help students prepare for the assignment and the exams, practice sets with solutions

More information

7. Bonds and Interest rates

7. Bonds and Interest rates 7. Bonds and Interest rates 1 2 Yields and rates I m thinking of buying a bond that has a face value of $1000, pays semiannual coupons of $40 and has 7 years to maturity. The market price is $943. Fixed

More information

Chapter 11 Calculating the Cost of Capital

Chapter 11 Calculating the Cost of Capital Chapter 11 Calculating the Cost of Capital (def) - Cost of obtaining money to fund asset purchase - use as estimate of r (discount rate) If we can earn more than the cost of capital (r) from a project

More information

CMA Accelerated Program MODULE 3. Financial Management and Management Accounting 1

CMA Accelerated Program MODULE 3. Financial Management and Management Accounting 1 CMA Accelerated Program MODULE 3 Financial Management and Management Accounting 1 Table of Contents Financial Management 1. Scope and Environment of Financial Management 3 2. Valuation 12 3. Financial

More information

CHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING

CHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING CHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING Topic One: Bond Pricing Principles 1. Present Value. A. The present-value calculation is used to estimate how much an investor should pay for a bond;

More information

Prepared by: Dalia A. Marafi Version 2.0

Prepared by: Dalia A. Marafi Version 2.0 Kuwait University College of Business Administration Department of Finance and Financial Institutions Using )Casio FC-200V( for Fundamentals of Financial Management (220) Prepared by: Dalia A. Marafi Version

More information