Quiz5_B(Answers)

Quiz5_B(Answers) - BADM 115 – Section 11 Prof. Isabelle...

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Unformatted text preview: BADM 115 – Section 11 Prof. Isabelle Bajeux‐Besnainou Fall 2008 Form B QUIZ #5 1. (3 points) Last year, Joan purchase a $1,000 face value corporate bond with an 14 percent annual coupon rate and a 15‐year maturity. At time of the purchase, it had an expected yield to maturity of 10.95 percent. If Joan sold the bond today for $1,254.36, what rate of return would she have earned for the past year? ANSWER: First, we must find the price Joan paid for this bond. N = 15, I/YR = 10.95, PMT = 140, FV = 1000 PV = ‐$1,219.93. VB = $1,219.93. Then to find the one‐period return, we must find the sum of the change in price and the coupon received divided by the starting price. One‐period return = Ending price − Beginning price + Coupon received Beginning price One‐period return = ($1,254.36 – $1,219.93 + $140) / $1,219.93 One‐period return = 14.30% 2. (4 points) A stock’s return has the following distribution Demand for the Company’s Probability of This Demand Rate of Return if This Demands Products Occurring Occurs 0.05 Weak (10%) 0.15 Below Average 5 0.6 Average 22 0.05 Above Average 45 0.15 Strong 80 1.0 Calculate the stock’s expected return, standard deviation, and coefficient of variation. ANSWER: ˆ = (0.05)(‐10%) + (0.15)(5%) + (0.6)(22%) + (0.05)(45%) + (0.15)(80%) = 27.70%. r σ2 = (‐10% – 27.70%)2(0.05) + (5% – 27.70%)2(0.15) + (22% – 27.70%)2(0.6) + (45% – 27.70%)2(0.05) + (80% – 27.70%)2(0.15) σ = 24.35%. B ‐ 1 CV = 24.35% / 27.70% = 0.88. 3. (3 points) A semiannual coupon bond that matures in 12 years sells for $960. It has a face value of $1,000 and a yield to maturity of 12.4903 percent. What is the current yield? ANSWER: The problem asks you to solve for the current yield, given the following facts: N = 24, I/YR = 12.4903/2 =6.24515, PV = ‐960, and FV = 1000. In order to solve for the current yield we need to find PMT. With a financial calculator, we find PMT = $59.19. However, because the bond is a semiannual coupon bond this amount needs to be multiplied by 2 to obtain the annual interest payment: $59.19(2) = $118.38. Finally, find the current yield as follows: Current yield = Annual interest/Current price = $118.38/$960 = 12.33%. B ‐ 2 ...
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This note was uploaded on 01/02/2010 for the course BADM 115 taught by Professor Bajeux during the Fall '08 term at GWU.

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