Solutions to final exam review questions

Solutions to final exam review questions - Solution to...

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1 Solution to review question 1 Answer  B) The quarterly interest rate = 8% / 4 = 2%. The monthly interest rate = (1+2%) 1/3 -1 =  0.6623%.  The annual interest rate = 0.6623%× 12 =  7.95%

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2 Solution to review question 2  Answer  B) . 008 , 1 \$ ) 024695 . 0 1 ( 000 , 1 \$ ] ) 024695 . 1 %( 4695 . 2 1 % 4695 . 2 1 [ 25 \$ %. 4695 . 2 1 %) 5 1 ( r 40 40 2 / 1 M 6 = + + - × = = - + = price Bond Note : the YTM given is the  effective  YTM, i.e., it is based on  compound  interest . Instead, the YTM that we have seen so far is based on  simple  interest . So if instead a YTM of 5% based on simple interest were given  in this question, then the bond price would simply be \$1,000 since the  YTM is equal to the coupon rate, therefore the bond sells at par
3 Solution to review question 3  Answer  A) 68 \$ P 75 \$ ) 75 \$ P ( 5 \$ 2 \$ P ) P P ( DIV DIV % 0 3 3 0 0 3 3 1 = - + + = - + + = The expected total rate of return over the 3-year  holding period is 0% since the annual rate of return is  expected to be 0%. So we have the following:

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Solutions to final exam review questions - Solution to...

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