practice - FIN 4243 Practice Midterm Fall 2009 Due on...

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1 FIN 4243 Practice Midterm Fall 2009 Due on 10/5/2009 Name: UFID: Useful Formula Time Value of Money Future Value Present Value Single CF Multiple CFs Annuity Bond Pricing Formula Simplified Version Coupon Bond Zero-coupon Bond Measuring Yields Annualizing Yields EAY: effective annual yield
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2 Yields or IRR Multiple CFs Single CFs Current Yields Annual dollar coupon interest/price Yield to Maturity Total Return Yield Change absolute yield change (in bps) = │initial yield – new yield│ × 100 percentage change yield (in %) = 100 × ln(new yield / initial yield) Bond Price Volatility Price Value of a Basis Point (PVBP) Absolute change in the price of the bond if the required yield changes by 1 bp Yield Value of a Basis Point Change in the yield for a specified price change Duration Duration = Modified duration = (where approximate percentage price change for a small change in yield is )
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3 Macaulay duration = (1+y)Modified duration Macaulay duration Convexity Dollar convexity measure = Convexity measure = Approximate Measures Approximate (modified) duration = Approximate convexity measure = Approximate Dollar Price Change Approximate Percentage Price Change Factors Affecting Bond Yield Spot Rate The yield used for zero-coupon Treasury Forward Rate Market consensus of future interest rate Ex. Relative Yield Spread (yield on bond A – yield on bond B)/yield on bond B Yield Ratio yield on bond A / yield on bond B
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4 Part I. Multiple Choice. 2 points per question. (Total 50 pts) 1. The current price of a bond is 102.50. If interest rates change by 0.5%, the value of the bond price changes by 2.50. What is the duration of the bond? A. 5.00 B. 2.44 C. 4.88 D. 2.50 2. Which of the following statements about reinvestment risk of a security is least accurate? Reinvestment risk: A. Is minimized with zero-coupon bond issues B. Becomes more problematic for those investors with longer time horizons C. Becomes more problematic when the current coupons being reinvested are relatively small D. Is present to a greater extent for those investors who depend on a bond’s coupon for most of their return 3. The duration of a bond is 5.47, and its current price is $986.30. Which of the following is the best estimate of the bond price change if interest rates increase by 2%? A. -$109.40 B. -$107.90 C. $107.90 D. $109.40 4. An investor is concerned about interest rate risk. Which of the following four bonds (similar except for yield and maturity) has the least interest rate risk? The bond with: A. 5% yield and 10-year maturity B. 5% yield and 20-year maturity C. 6% yield and 10-year maturity D. 6% yield and 20-year maturity 5. Assume the following yields for different bonds issued by a corporation:
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practice - FIN 4243 Practice Midterm Fall 2009 Due on...

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