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UNIVERSITY OF ILLINOIS
College of Business
Finance 515
George Pennacchi
Fixed-Income Securities
March 12, 2014
Answers to Mid-Term Examination
Instructions:
The time for this exam is one hour and twenty minutes.
The exam is closed-book
except that one 8.5x11 inch page of notes may be used for reference.
Show your work.
1. A corporation wants to fund a short-term project and has decided to privately place zero-
coupon debt that promises to pay $1 million at maturity, where maturity is exactly 183 days from
the date the debt is issued and the investor makes payment. The corporation requests bids from
institutional investors by inviting them to submit annualized yields-to-maturity that they would
require to buy the debt. Because the corporation did not specify the convention investors should
use to quote their yields, it receives quotes based on several different conventions.
1.a (3 points) Investor A submits a bid equal to an annually-compounded yield of 4.05%. To the
nearest $1, how much would this investor pay for the entire debt issue?
(
)
0
183/365
$1
$980,292
1.0405
m
B
=
=
1.b (3 points) Investor B submits a bid equal to an quarter-compounded yield of 4.00%. To the
nearest $1, how much would this investor pay for the entire debt issue?
0
4 183/365
$1
$980,243
0.04
1
4
m
B
×
=
=
+
1.c (3 points) Investor C submits a bid equal to a continuously-compounded yield of 3.98%. To
the nearest $1, how much would this investor pay for the entire debt issue?
(
)
(
)
0
$1
exp
0.0398
183/ 365
$980,243
B
m
=
×
−
×
=
1.d (3 points) Investor D submits a bid equal to a bank discount yield of 3.90%. To the nearest $1,
how much would this investor pay for the entire debt issue?
0
183
$1
1
0.0390
$980,175
360
B
m
= −
=
1.e (3 points) Investor E submits a bid equal to a money market equivalent (e.g. repo) yield of
3.97%. To the nearest $1, how much would this investor pay for the entire debt issue?
0
$1
$980,218
183
1
0.0397
360
m
B
=
=
+
1.f (2 points) To which investor should the corporation sell its debt?
The corporation receives the most money by selling its debt to Investor A.

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