ME515S14ans - UNIVERSITY OF ILLINOIS College of Business...

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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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