Fin550Midterm 2017 KEY.pdf - Exam Points Exam Points I : ...

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ANSWER SHEET
Do not remove the staple
Finance 550 – Sandeep Dahiya and Lee Pinkowitz
2017 MIDTERM EXAM
Last Name:_______________KEY_________ First Name_______________________
CIRCLE Class Time:
8:00 A.M 9:30 A.M. 2:00 P.M. 3:30 P.M.
Please read the following instructions carefully:
(i) Put all your solutions and work on THIS answer sheet. We cannot give
partial credit for things not written.
(ii) Read the questions completely and carefully . Make sure you
understand what is being asked before launching into calculations.
(iii) Please put your final answers in the boxes that are provided.
(iv) For dollar figures, you can round to the nearest cent. For rates, carry
computations out 4 places (i.e. 0.0123 =1.23%)
(v) The exam totals 190 points. You have 180 minutes to complete the exam. Allocate
your time wisely. Use the number of points assigned to each question as your guide.
(vi) Check that there are 11 pages and 6 sections in your booklet (16 questions)
(vii) In order to get partial credit, we recommend that you: (1) attempt all questions; (2)
show detailed calculations, time lines, etc; (3) write out the inputs you used if you are
using a financial calculator. Make sure you write legibly, if we cannot read your
work/answer, it is wrong.
(viii) Resist the temptation to answer questions with a “shotgun” approach. Incorrect
statements, even if they are irrelevant to the problem you are answering, will be
penalized.
(ix) If something is unclear or ambiguous, state your assumptions clearly and go ahead
with answering the questions. In a multiple part problem, use the assumed
answers to solve the later parts. This allows you to skip sections if you get stuck.
(x) Good Luck
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Exam Points
Total :________

SECTION I: THE TRUTH WILL SET YOU FREE, BUT FALSE
REQUIRES AN EXPLANATION
Questions 1-3 (15 points total)
True or False, Explain: (15 points total – 5 points each question)
Use the following information to determine whether the statements are true or false. Check the
appropriate box. If the statement is false AND ONLY if it is false provide a
BRIEF
explanation as
to why it is false
(BRIEF means AT MOST a few sentences).
Show work if necessary.
1. For every bond, regardless of the time remaining to maturity, the coupon rate decreases when bond
prices rise.
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2. Assume that all rates are strictly positive, and that you have two cash flow streams which are
identical in all aspects EXCEPT timing (i.e. SAME risk, SAME size of payments, SAME number
of payments). The first cash flow stream is an annuity due (payments at the beginning of the period)
while the second is an ordinary annuity with the same cash flows (i.e. the SAME payments at the
end of the period)
Statement: At any given point in time, the annuity due has a higher future value than the ordinary
annuity

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