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Unformatted text preview: BADM 115 – Section 11 Prof. Isabelle Bajeux‐Besnainou Fall 2008 Form A QUIZ #5 1. (3 points) A semiannual coupon bond that matures in 9 years sells for \$1,060. It has a face value of \$1,000 and a yield to maturity of 9.2375 percent. What is the current yield? ANSWER: The problem asks you to solve for the current yield, given the following facts: N = 18, I/YR = 9.2375/2 = 4.61985, PV = ‐1060, and FV = 1000. In order to solve for the current yield we need to find PMT. With a financial calculator, we find PMT = \$51.17. However, because the bond is a semiannual coupon bond this amount needs to be multiplied by 2 to obtain the annual interest payment: \$51.17(2) = \$102.34. Finally, find the current yield as follows: Current yield = Annual interest/Current price = \$102.34/\$1,060 = 9.65%. 2. (3 points) Last year, Joan purchase a \$1,000 face value corporate bond with an 9 percent annual coupon rate and a 20‐year maturity. At time of the purchase, it had an expected yield to maturity of 8.54 percent. If Joan sold the bond today for \$976.34, 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 = 20, I/YR = 8.54, PMT = 90, FV = 1000 PV = ‐\$1,043.40. VB = \$1,043.40. 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 = (\$976.34 – \$1,043.40 + \$90)/\$1,043.40 One‐period return = 2.20% A ‐ 1 3. (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 0.15 Weak (40%) 0.15 Below Average (15) 0.5 Average 8 0.1 Above Average 33 0.1 Strong 78 1.0 Calculate the stock’s expected return, standard deviation, and coefficient of variation. ANSWER: ˆ = (0.15)(‐40%) + (0.15)(‐15%) + (0.5)(8%) + (0.1)(33%) + (0.1)(78%) = 6.85%. r σ2 = (‐40% – 6.85%)2(0.15) + (‐15% – 6.85%)2(0.15) + (8% – 6.85%)2(0.5) + (33% – 6.85%)2(0.1) + (78% – 6.85%)2(0.1) σ = 31.24%. CV = 31.24% / 6.85% = 4.56. A ‐ 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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