Exam 2 TA Review With Answers

Exam 2 TA Review With Answers - FIN 3403 SPRING 2009 Exam 2...

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FIN 3403 SPRING 2009 Exam 2 Review 1. Assume that a 10-year, $1,000 par value bond pays interest of $37.50 every six months.  Also assume that investors are willing to pay $914.71 for this bond.  Given this  information, determine the investors’ annual required rate of return or yield-to-maturity for  this bond. * B. 8.80% N = 20; PV = -914.71; PMT = 37.50; FV = 1,000; Solve for I/YR  =  (4.40)*(2) = 8.80% 2. Assume that you buy a 10-year bond that will mature for $1,000 and pays $40 in coupon  interest every six months.  Also assume that the current annual yield on this bond is 9  percent and that it is expected to stay at this rate over the life of the bond.   Now assume  that you plan to hold this bond for 5 years but that you will put any coupon income  received in your checking account earning a zero percent interest rate (i.e., your  reinvestment rate for the coupons is then zero).  Given this information, determine the  “realized compounded yield” you should expect to receive over this 5-year period. E. 7.64% Determine Price at Year 0 : N = 20; I/YR = 4.5; PMT = 40; FV = 1,000; Solve for PV  =  $934.96  =  P 0 Determine Price at Year 5 : N = 10; I/YR = 4.5; PMT = 40; FV = 1,000; Solve for PV  =  $960.44  =  P 5 Determine Ending Wealth Position :
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Total Coupons to be Received:  ($40)*(10)  =  $400 Future Value of Coupons Reinvested at 0 Percent:  $400 Total Ending Wealth Position:  $960.44 + $400.00  =   $1,360.44 Calculate Realized Compounded Yield : N = 10; PV = -934.96; FV = $1,360.44; Solve for I/YR  =  (3.82)*(2)  =   7.64% 3. Assume that Bond A is a 5-year, $1,000 par value bond that pays an annual coupon and has the cash flows listed below. As you can calculate, the price of this bond will be $960.10 if the annual yield-to-maturity is 9.0 percent. Given this information, determine the duration of this bond. Year Bond A Cash  Flow Weighted Cash  Flow PV of Weighted Cash  Flow 1 $80.00 2 $80.00 3 $80.00 4 $80.00 5 $1,080.00 Total PV Year Bond A Cash  Flow Weighted Cash  Flow PV of Weighted Cash  Flow 1 $80.00 $80.00 $73.39 2 $80.00 $160.00 $ 134.67 3 $80.00 $240 $ 185.32 4 $80.00 $320.00 $ 226.70 5 $1,080.00 $5,400.00 $3,509.63
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Total PV $4,129.71 Duration = $4,129.71 / $961.10 = 4.30 Years   4. As you can calculate, the Market has an expected return of 7.00 percent and a standard  deviation of 1.5491933 percent, while Security A has an expected return of 16.40 percent  and a standard deviation of 4.2708313 percent.  Given this data, determine the correlation  between the Market and Security A. *
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This note was uploaded on 04/08/2009 for the course FIN 3403 taught by Professor Tapley during the Spring '06 term at University of Florida.

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Exam 2 TA Review With Answers - FIN 3403 SPRING 2009 Exam 2...

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