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Unformatted text preview: diestion 1 (25 marks) (a) (1 mark) When solving Time Value of Money questions, explain why it is important to
w your PV or FV notation.
' seams: PV is w Prue/n4 Vaiw‘a without Mt’aking
into acct; unt of“ ‘fm valet e at Money. awe FV is ﬁx W with «H451 em Vow/temp oné‘tjf't (b) (4 marks) A UBC Entrance Scholarship can be paid out in four equal .006 amounts at the beginning of each academic year OR can be paid as a W l9“8” amount at
the begin—MW. lf th 7 propriate discount rate is 5% per year, determine the
amount of thi “ p s . ' t. [000 at! [0109 534404.88! (c) (5 marks) You are going to withdraw $1,000 at the end of each year for the next three
years from an account that Mme rate of 6% per year, compounded annually.
The account balance will reduce to zero when the last withdrawal is made. How much
interest will you earn on the accgunt in the second year? F i 2
Pv 1000 LOGO [Geo i~Cl+ociJ
W a (000 x
G—Ul:
; zevioi x JCLI = 2575 ol much = 8383‘] icoo :16333‘? tn @3339 x a “rot =
Pagelof j} (2 marks) What explanation could you offer for a downwardsloping term structure
interest rates? emTeE‘F‘m‘fla‘an EXPEC‘lEd ‘t‘ {M1, expected " ‘ ‘ "  T '3" h‘wrr ‘ .. . ,ng ,, :.
Jute/raw mt tilt L9 una .. GigEm: dfCl‘SWQ (TF'F'Se‘f‘ s PEI/'WIW b
. new more 01cm Lampoon pay TiS mix 6
Q _ interest at N near
r‘tOWMdV—MAQ blag'mrlmg to than r5 t‘buz
' 1%] end .
(9) Below is a time line of a Canadith th oupons paid Semiannually and
$1,000 face value as shown: as
0 1 2 3 4 years (i) (1 mark) What is the coupon rate of this bond? Your answer:
(ii) (2 marks) If the price at Timeo = $916, than them of this bond i :
(A) 4% " 3% : K . ( 68H @ disco Main '1'
(C) between 4% and 8% (D) Less than 4% : 2130 r > 4(— lo
(E) More than 8%
Your answer: (iii) (3 marks) Write the equations you would use to determine the exact value of the YTM
in the bond described above. DO NOT SOLVE.  TM ~l8 _.
"" l 12,— TM 8
[r mar—op (i 4.? +[OOO([TT7)
a. Y TM 2’
11 Q_ Page 2 of 9 ) (2 marks) What are protective bond covenants? What purpose do they serve? \
qt v . t . bend covenanty State W mhvahan FF 61 {Ml b‘md C CR . RICE WINK”) and hot: 01 red ui‘rtW+ finest m Orgami>afr0n that {EttaHag: burial B063 "it" PM W («WWWm Fwy/Monti“. which PYo’I’thS indMt 4mm oteiceuH. mt bend. ‘
(g) (5 marks) in a recent collective agreement settlement, the workers at UBC will receive
wage increases of 3% in the ﬁrst year and 5% in the second year. ( I) in percentageterms, what. will be the total increase in their wages? ‘(f Pop; :*[00 new o‘6.{.§7’_(oo
:*%,_'§@ % int in wages? : 8‘15 :(8_;sjrt.)\/ ‘lh (76' 0 (ii) Suppose that d ‘ng the first year of this contract inﬂation is £94: and during the second
year inﬂation is $6 How much has an amp oyee s purchasmg power "5"—
increasedldecreased over this period? W % t0 0 no at
, (£56, Yeai r052 . ([oox t.os)x(taos) : {08.15. [scum00340452) ; ﬁojvz ,/ int. in nominmi “50,995 ﬁrth) £08.15“ @
{08.6 / Veal idie "—‘ {Ciel "" Z 0434—98 / :9 I 4  Ci 8 0
Please do not write belowt is ' . Page 3 of 9 Question 2 (20 marks) w
/
Bill bought a Porsche 911 sports car for $36,655. At the time of sale, Bill decided to finance the car using a loan fLomJlenture Bank with the following terms:
Finance the car loan with 48 u onthl at the interest rate of 9% per year,
WW. Mon ly payments would begin in (imam.— (a) (6 marks) Determine the monthly payment owed to Venture. o r _2 3 4:? 4%,
1 Ar k A _ A; .A
‘i 5' ,
mum : 1+ 0: ]”’._( 9v: 3st,“
momh . : 0007344“ ‘9 0‘744'?" (b) (5 marks) After making the 15m payment, Bill decides to go to Europe, sell the car and
pay off the principal remaining on'ﬁis loan; How much does he owe Venture after making the 15”11 a ment? .
12y \b '7 4'7 4’6
Riki—W
A A ii A
g h ' 15
pmywuunfs {El'T 3? 43"% "15 Page 4 of 9 j (c) (1 mark) After the 15*“ payment, Bill's brother Darren agrees to buy the car for $29,000.
/ How much money will Bill have left over after' meeting his commitment to Venture Bank? lacuna ~* ZLSE’l—ll C? (d) (8 marks) Since Darren does not have enough cash to purchase the car from Bill, he
phones around to many different lenders and finds that, unfortunat 'nterest rates have risen since Bill bouht the car and the best rate Darren can get ier ear
ompounded . Fortunately, one of the features with Bill’s oan'fr‘om Venture is
the ' — n  assignable”, which means that Darren can take over the 33 remaining monthly payments to Venture.
(l) Explain why this is a clear financial benefit to Darren. . haulage Th2. “new” loom agreew/ﬂ'l' has wan htghw
cl Campuwneleci interest rode (19‘ PM more lhTe/fesT) WW3 l'WQLLW‘Hj . =7('mferesr on “mt esr more ‘HRQ/“e’hﬂ‘j)
’9 in TimQ. end 4462' Darren h 96.); m Moral Whey 0 ‘ l2 ____ ' __ ‘ M a ' . x
E‘WT‘AN : + n. )m _ F O ‘0‘ a“ 9 [la/Inentk leﬂl’ly he!!!
0 (ii) In dollar terms, how much better off willDarrenbe‘if he assumes Bill's loan? —an n 0 ~ ‘3. Bill's loom = ZiasinreMstmtri We 16%“, T 7' 0&1374’4— a
W K A — who ‘ll #— Mai} is at;
New lean In/Lontlnlqvamp, . q .
wwwq‘” C 0 . ' ' '
ace  k «NA (3° SM @ 4F l0
5* 7ft : [0359‘ng l0 l7. [035: alga—141;]ng )33 a» D‘IH erﬁmte = Question 3 (16 marks) Tim Hortons is planning a lottery called “Double Trouble”. The winner will receive $x at the
beginning of the ﬁrst month, then $2): at the beginning of the next month, then $x at the
beginning of the 3" month, then $2x at the beginning the 4th month. This pattern will continue for a total of 19 monthly payments. he details of this problem. (a) (3 make) Draw an accurate time line which clearly shows ALL t
[M “ ll I3 r4 {Yrs {2 ft 0  ‘1 5 4 S e '7 ‘6 Ci l0 u
’1»: orex WQK’X‘ZK: glxwlxxuqugcix'x
l pawnumtc 5 1” (b) (10 marks) If Tim Hortons discounts its cash flows at 1% per month, and is only willing to
set aside $50,000 at the ggrmﬂheJotlery to meet its total lottery obligation, determine
the amount of each monthly payment the winner will receive.
r 10~Gl/mom‘ln. ‘PF 30 DUO J
‘ L 1% 50ng e 8.158.!) + 3(6—8277m
l anthly Z 001 ‘= (‘[‘+ r ) '” l _ n
a a Sane.— 84333 A C
: l. / ECU . /'
L ‘ W 3/" 4:1’5‘1’87ﬂt. 0“
r. r . 0129% 5 ,__ at
zmnrhs + ——.~———«l l «x = 151,4 :%1(Wm_7<()2 l‘lQS’fli 2x 5‘???in
.: o .0201 ngmnma
t: "l 0 ' "’
W 3;: 3x  2x 3 .. 3 _ ' , ’ ,,
x 3* X ‘ 3X 31 0C t
qP‘W W“ Vic 37¢. let 3x1)”: /.»"LAU ,, / J)
1 " E" I .__ ‘ . h _ 5‘31 ff
5000\{3fojuj} A [l (1+ 0 02m J+ éALHO‘W)ilJ_// 1‘ 0010) . ll
(c) (3 marks) If the winner of this lottery puts ALL éﬁhe wItnnings into an account which also monthly payment? q ,
i an Jltlm 2c‘ 7
{,V: 5737.7T[L__;jﬁ__ A; lclcisfh Question 4 (19 marks) Ruby paid $066.2 seve ears ago to purchase a $1,000 face value corporate bond issued by the XYZ corp a on. e bond had ﬁfteen years to maturity Lime time Ruby bought it, a
coupon rate with coupons paid semiannually, and a yield to maturity (YTM) of 7.5%. < Seian _ a  after purchasing the bond, Ruby observes that the bond market now expects a
can this bond. Ruby decides to sell her bond now. Assume that she sells it just
‘  o o I after th d pays its most recent coupon. Over her seven year holding period, Ruby deposited the bonds coupon payments in a bank
account earning 3.6% APR, compounded monthly. (a) (5 marks) Calculate the price at which Ruby sells the bond today. F=looo I: lQOOxQ‘SBJ‘iga l5“? = 8x21“? Paymtiyrei‘t
YTMhow z r" 2""
‘ r = ‘t‘l 0/“
~ vie  it?
P :30 [lvUiocél—CI) ] T [UODCIfUwpﬁ)!
0.044 s / (b) (3 marks) Did Ruby choose a good timeto sell her bond? ( Please circle the correct
response and explain.)  Explain: it.. I
' ’\‘ Effie59d 3'13? .
. ‘ % Page.7on A, _V§a{é/ST%{;&“F. 5 p
"  I may“ . t... _ (2 marks) The YTM on Ruby's corporate bond changed over time. Please provide two possible reasons for this change in YTM. _, ' a m Cor paraté bond may howo betel hi cake/ii rist: prétiie
wire 9“ marrth w: 11 "Oi/M1" Hg her tampons for " can? t k .h Lem w5a*r0n (T? “Til
arm oWerg‘snds one GHQ/ring im' ‘9 (1ng {10¢ Mr bonds whi ch [pa 5 mi mﬁmﬁi‘vf
' etc. a  b ‘
(d) (9 marks) Calculate Ruby’s realized holding period rate 0% retﬂrtn (R0 ) on this bond investment. How does it compare to the bond’s purchase date YTM of 7.5%? Please
give a brief economic explanation for your result. L R Sell Price, + FV Utre‘invested (outpr '1 ﬂi
go E Emmet .price ~ H“ at— Ninuuto—ol Lampens. “(J
"Iv—J l2 {SQ/Will :— + P'G3L] a: ' 12”” 2". 050185 L‘+O'btgi3)‘4'" 4“
‘ = . o ,__________._____. e 3.1?
H! 3 L “W; cm «Lust, QM howl 6x capital \GH,WW bacqutse
$J¢Hflrxa was: lagnot, S (conci,J¢4_gf elm reinvested @ On rare lowM "ham YTM. Roe
Both LonTYsYa'theoi 1'5 "JCW lbw“ ‘ Page 8 of 9 oestion 5 (10 marks) While working as a summer intern at the Acme Accounting firm, Cam Commerce was told the
following by his superior: "The Federal Government is planning to issue a World which pays annual coupons of
$260 and has a face value of $4,000. They plan to offer this bond at a price of $4,050.00. The
government has asked us to check if this new bond is priced fairly or whether or not a possible
arbitrage opportunity exists.” There are currently two other Government of Canada Bonds trading in the marketplace: Bond 1: 4% annual coupon, face value = $1,000, 2 years to maturity, current price = $ 975.93.
Bond 2: 6% annual coupon, face value = $1,000. 2 years to maturity, current price = $1,016.71. p5 is“ ‘ salt H @ higher I  \
Price “to fawn proﬁt" < x/k/ (b) (8 marks) Using the information provided above, is ' 6 proposed price of this new bond
correct? You must use proper technique and provide convincing and detailed evidence to
suport our answer. Today ‘5 PH (1 e (a) (2 marks) What is meant by the term arbitrage? “if m : "itsF beholt "f0 be)!
y t ii D'F bond ’2, “E0 but) @tzl 4—0’X +boye2loo a.) lbdtoxrrgbofzg/No
[040% Hobov : 42km '* (“Ext 'OLOYt‘T’U’D
WW: 25‘00 : ‘i‘iS‘i; bi) + {ole—71(5) Fri“ haw ﬂ 4075 +£30LS):1EU '3 5/
_:¢Ho'7.LZ  ’Xz—l 7
M 5; n g b Who) r If ou needmore room, please use the b£<of this page. a ly'cot‘l'lcﬂ '
I 2) Sellibcmdﬂ ,EmyY is be ginOt/Lic; be r'[email protected] Pa (:9on
Ln @ ‘ g / hoof/(2‘ ﬁéllh'j £2 mil/oer +L0m$4559 {because law FPS“? price.) ...
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 Spring '10
 BRIANGRAHAM
 James Bond, Bill bouht

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