Comm 298 PastMidterm1

Comm 298 PastMidterm1 - 20:3 #2005 MT Question 1{21...

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Unformatted text preview: 20:3 «#2005 MT Question 1 {21} marks) (a) /f (b) (C) (2 marks) Bank A ofiers a 3 gear fixed term savings vehicie which ofi‘ers 7% in the first year, §§§2ain the secazzd year and e t 'rd and final year. Bank B also ofl’éfiggwyear fixed term savings plan that offers 3% in the first year, 5% in the second year and 7% in the third and final year. Both pians require invegtors to ieave their meaty in the plans fer the entire 3 year period with no opportunity to withdraw their fimds. Which of these plans would an invests: prefer? Please explain 3hsz 2,3; we 5% Eng (4; 813m ‘1 if‘fiflitwsgfl t M“ «if m: M- aauk 5.» I “$51105” m "-M (2 marks) Money grows at 8% pa! year and inflation during this same period is 3% per year. How mach better off is an investor at the and 0f the year? n *— 3?“ ;"' Sfifi' 1'! $4535 ~ :3 v {851$ Zea “F563 W E 6‘ C‘WSthfi .2 élgfggffi (2 marks) You are reading the bond quotation table: in the Financial Fest and notice that two difi‘erem campanies who have cumming corporate bands with identical maturity fitcs and coupon rates are yiekcfing 5.17 % and 9.25 %. What is the mast 5ker reason far this difference in yieid? NYE; risk: Rig}! e~r . {Nu éafa‘ua fish at“? 44x: Emmi ‘ h fi-‘fifl :5 5‘1???» ‘ Magafuq“ Mg3~§W§ figmamé K Page i of 9 (2 marks) Provide an initiitive reason why bond prices are inversely related with yieids. 5 {9% Eufiéfizfivts i (View a;va ‘9‘ wig; *0 mm m WW: Lgéaié At {is EMA immitVS {o m {5 a ‘ 3:21am we». Mmfi we mg mg (mm in CEKILWEBL 3t Esgéflk' {31v damaging 5311A; ‘ Emmi gr???) {My ‘1"? with “Ni- Jw wwc‘ mi; m “I‘M w: mth a“? mw‘u‘i «m. (e) (2 marks) if the Bank of Canada guts $1,000 more into circulation and if we assumethe commamiaj banks’ average reserve ratio is 8%, than by how much will the mofiéy supply mareasefdecrease? _ m ‘ [5/9454 $9 : iwfi Q: i _ ‘w . yr” I $3453" 333? "M 413-30 Em * 5 “‘3‘ ‘ m ~ szsaw f) (2 marks) What is :he main purpcse of financial markets? mi“ WWW»: E; *9 fiu mvgaims amt: 32ft?“ wma (Sawv'i 3 {fin 11M {‘owww was) mm; a “Whit? v £¢£€u€€fl£¢§ Page 2 of 9 {g} (3 maxks) Why would you buy a bond selling at a premium ifyou know for sure that yau wili incur a cagitai loss because you intend to haid the bond to maturity? M wag-w. “(€125 wi- mé- W «Gaffib mil 6" {Est (mgPWB 2‘1. ML, {QWW- » Eve,“ “Ham :gjn \ 5 wtfiw‘ iv. (imam-m a («yiml (as; (A mtuv Eng ‘ 5‘{ M Ewefi‘mmk Met; 5‘1 W58 x 3: sum @mmhcx M m firms-‘2‘ (W3 flu”? am 4%}; M3. "imifla a; waWE‘hS ‘5‘“! Patna: Mm 6f” “‘19? (“EW5 5““‘4 M W (aft ' ’i’ ¥ {A 3 E§ 3 \ M (h) (3 marks) A perpetuai band issued by the British Government has a price today of $3,250. If market yieids remain unchanged, what win this bond sell for 20 years fiom new? Provide a brief economic explanation of your result. Wm 39 W“ {WM ww‘ W95, grab-sci u?“ $51 i=1 90:33 A {ECO Lg“ (i) (2 marks) List 2 major functiens ofthe Bank of Canada. L0 “51‘: {make :93- finish/*5; 15‘; L wgwé mum! figwx*"’"' {pvfi'Vfi Yd} ‘4~a?€“§ wfi Em. Wé‘av / Page 3 of 9 Question 2 ( 10 marks) Suppose you would be able £0 borrofi§4£0€i your relative Undo Rico, at the very low rate 3%. “* APR, comgoundqg annuaily. Payments @311 be made with _e ual yggfifiggyfleptsrfggényfls begixming at the end of the first year. We Eocal bank offers a savings aném7§é§you 9% APR, compounded semivafinually. Since you are borrowing at a lower rate than you could cam on the savings account, you are better off. ‘ W , as}; 1. Ass 7’» 1w 5,: g (8 marks) In doiiar temségow muoh better off are you? b 4 .0" m5? :, 1 4‘ v ‘ I 29,313; _ 1 7, x a of Y 3 id . . 4 ‘ 3%, q»%‘% 70 " )c x ,4 x x 36: Sam-3&3. 4m m /“ . 315m. "~31 f -- ' f 3'. -" h ‘1 ‘5 Mr“; AM u; ojgcifl'(‘-‘$3g) a o‘oathg {ktflymflfi j = " 331m“: firm/'5 mini WMMW M A i P ;. ‘ % m 4 ~ M F a, 3 \ I” « ¥ ‘3‘? a: QM 33%. Skim g a war“, of fix ‘ P NM £3ng a 43;; x . 1 M, \ " Féw. 4: x " W I \N M ..... M ; \V\Lf/nv_4,,w u.- (b) {’2 marks) Grandma belie-ch that Uncie Rico is foolish for having offered you what she cans “a bad doai”. Rico’s answer is that it is not a “’oad deal because if you take the loan, he‘Il end up wé'ih mom than the $4,009 he started with. Criticaily comment on Rico’s logic. m ‘éfi'a’ a 96:“ haw mart. Rama Ru $‘fs‘fim Rik-fl ii" (Tm) A F iéwv‘é“ \ é:qu {ca/aw Ex gig; ago)» 45,”? au. $25M“? -. gm)! "gm = '1' ? w 1' g . * yum“ ‘5‘ 3*"??? o a» W wo‘ aim we FWfiwhitx M‘Ewifrfiffi‘“ 5'" Tog“ WW km" ‘Efi‘i’i S‘E Wib‘f ‘3 “{va 4151‘“ S ‘ <;I:\‘:3’f‘ Page 4 of 9 Jgestion 3 ( 19 marks) imagine that you have graduated with your Bacheior of Commerce degree and you have a. job as an independent credit counseior. A, client, Nam comes to you for advice. He needs a 25-year, fixed rate mortgage of 3330.309 in order to purchasg his first home. His local credit union wfifiahim the money at an _3 gercent APg, compounded seafl—annualiy. (This interest rate is truly fixed for 25 years, the entire life of the martgage). However, Norman beiieves he can only afford monthiy payments of $2900, 'i‘herefore, the credit union is wilting to allow Norman to pay ofi‘ any remaining loan balance at in end of the Roan in the form of a singie iumpvsum paymem. The credit union queued the amount of :his fump~sum payment and Norman is horrified. He is sure thai there must be: a mistake. 1} (7 marks) Assurrfing that Norman keeps his monthly payments at $2,000, how large must this iump- mm payment be? Caiculate this number for Normaa E3" W“ 15' W ,x {1 i {1* {M'le ‘ S s .u 4 "» M 361; tar s ayuhfiflss‘qg Mam 2630 [main . am i 9~£>5$ma w w '6 K ’ hi3 W‘fiéig ffiims ‘I _ . U3. m I w ‘m "‘ 3 _ fl ‘\ “3 10%: (mg. tum-MW a £32. .. i S“ '2 {inguiul ‘35 ism {{ éififiem m ta; ‘* Fir.“ : (EMEWDNLMV «*2: $1M ug- 4‘» f“ x - " L/ 9 am #5553434 1‘ itamymm ijmm‘t $5. ‘- 31 iSA‘ 121,4S f5 IWWM ) (.3 marks) Please expiain to Norman, in terms he can understand, why the imp-sum gayment is {he ize that you have calculated. ' {1511b yafisunfi“ :5 3;, Mafia 9: Emma VNL ‘ilm Wfiiq‘ ?;g;{;m‘§\ magi: cf w $1636 i?) ma w gags Swag am am“ firing“ a “(.3 wan? wt“ $ a - 3 . \ . .. a 3x, figs-m 9’? W , um 33?: Maia W ganglia, (fag-19‘,me fdnik “Egan {iv fax“ {:Fh ‘wa Min 5%; Miami; rats: {w saw-1 Wii'éq \ i a jaw Ewy‘ww :5 (Mug. flak} « V ‘U A a 3 i Page 5 of 9 0X4 marks) Flease fist twc difi‘mnt. alternatives, unflining what Norman could do differently to avoid paying - this lump-sum paymeate I. hwy-:3} a. fiat-gt“: «949.651 35* Mégfl www.m‘wmmumwn N: {mm “s m (Wham $021k Cmfimm m‘éaizj Piufiimfif‘: . 5 .am M mu «:1 3&2 agatna gagmfis safe Q. ~ M .gmsa u»- {I‘wsfismmfi} W¢i\ no 1m? mm a n2wa our}! M MW: :3 5%me ma rm 2“ Fiwsi a Wat flax!» ’3 wait: 4“: kié‘aw ha“ 5‘ kiwi) {cm} We; {rank fizwa lu rm affwé mv (av-1:6 mmfi’iifi Wfiamffi‘ {Mkm in; kw. {mwa‘z mil ~ fifiww‘fw?hm MfiWh W 6%“ Ex {Jam mam: Mé Wt: (can? gum fugué‘f'ed. d) (5 marks) Choose any one efflw We aitcmatzves ii in gran (c) above and previde the calculatioas and solution that would be necessary to support the: aitematiw chosen. (Sham : mm Ni WWW mm ‘ M W55 “13‘” Maura“: Pulls “M‘s. W5 . V5 = in” ( . I _»-'5,w ) 3m campassfiiqb M (I. 55 ggffiq‘zx $§§qm w. x {151.0%}.24315‘: x .~.. grams». €113?“ ; «iizsaafls / Iva 5’53“! gafizufi 11% Mfifilts ‘ W ? l; ‘3‘“ . q W m“‘ ‘1‘ {M3 m fi‘é #m‘ 23"?“ lgzuv' [mm‘n’um «’w fig/WV“; W"; 3‘3 Raw; 93 J 19;}: Page :6 of 9 ,Erestion 4 ( 13 marks} Five‘years age, Ramona paid $412453 to purchase a Government ofCanacia mg} face value bond. The bWfifiééfi‘mg to mamrity at the time Ramona purchased it, a coupon rate of 8.5%, with ' cm; 0 aid scrap-annual , a ’eid to .maturi of 79’ . . \ (5 marks) Caicuiate the current pfice a; which Ramona selis the bond. 1 e; .g: -1 x 1/2533“ my. s. 1* h l ‘ i a. m e. 3 v; “ ’ ‘ ‘ ‘5 .h A 1% rfl-wmumb - GI by!” SW & V; “g g?" .\ V K gzh'xccfi a « Km ' _ +2~s _ W 3 Pfi- 31: «(3Q Y} (0- PVJb;43 0‘“? (3“ (Lazy) ) + Lays“) {‘5 d :mym : 3,57% KP '01“ x = $425 masw . 31 $4» 2"???” 1 \a w” ( i m {fix/"Ha a pm or “bi é'io.m§"%5'* 3 éztijy ‘* Migg‘im‘a‘é's =-“‘ [131-18 @(8 marks) Caiculate Ramcm’s reaiized holding period rate of rerun: on this bond investmeni. How oes it campare to the band‘s purchase date Y'IM of 7%? Piease pEOVide a brief economic ’f expiaaation for your result. 7. ,1 , g i: 2 2. g 4 V k: p was / 5 i i 7 ‘ V 1...”! g .1 335‘ mamhmmmwwmm m.mm.‘_..WW f: g 4 {p cigfi 5* 1 6% f ‘ ‘ fimxs "5 mm? WW; €w m WW '~ 42‘5'f21wfifimmflfi- i) magma“: i... 3% ‘ hm my s ; Ragnar «emmfi-AG -“» Hflcfiflfig fim,‘ a»? m (“pm {3213‘ flu hwmtui mu 53 aim 5" w WOfiE 1 Nb“ 0 '* *r ‘1 Wm w“ Wm g #70“. ; 'er 1» ii‘fi $456; ‘ M s{ m Wang I { milw . 26’ E x: '3 r =~ $1, {1; £3 ‘gy’gg Emuaé mfg {mtv‘t‘pufid 4w fin "\ Questitm 5 ( 18 marks) @rfiw‘ Suppose you want to determine the price ofBond 3, a 2-year Government of Canada, zero canyon bond with a $1001) face value. You obtain irrigate quotes (:11 two other Government of Canada bonds, bath with $1000 face vaiue. Those bonds which pay coupons do so annually, and please assume {hat they have just paid their most recent coupon. (Le. yam: have exactly one yaar to go before the next coupcn payment), You should assume that these two bands are correctly priced. Details are as fellows: Bend 1: 4% angina} coupon, face value x $1000, 2 years to maturity, current price = $896.20 Bond 2: 6% annuai coupon, face vatue = $1080, 2 years to maturity, current price = $931.10 a) (6 masks) Using Bonds 1 and 2, Show how you can repiicate Bond 3, the 2*year zero coupon Government. of Canada band with a $1,000 face value. What quantities of Bonds 1 and 2 wozflé you buy or sail t0 repiicate one of Bond 3? W f’rm; iq h. 7% {afikauiz Ema “$3 : ‘wf’ ‘35:: r ‘3?“319 £36 Maw 34 mg; {G M5 3 i \f 3:“ ; $ {wtm {3‘0 $953.0 gang 1?“ M3 {kg 3 4, g g 1 §' jg G 3mm» L! f m, {A #1232 w £07 at: ’/ &? ~'%x ‘ g .& fl «- w~w w w? *3 =~ A at, “£3 Ecitbx 1» wéu? r“ $§m m Mini f ieéafl 55:} “m gag“ a. 3 3; gim v v: rd 3:, x E$$im a flaw % “ 3; b)(2 marks) Based on you: replication strategy in part (a) above, what price should Bond 3 sail for taday‘? Why must thiS be the prim? i: V ‘ :9; 3:35:15; { a: §fl5g.xb} x; ' M . a i‘gfiwsi “gm: 5? 3%.— ~'» {i’SLiO PM L $§3&%1§ g Page 8 of 9 5.4-5: 337'? ‘ 525 marks) Suppose you find that the tun-em price for Bend 3 is actually $800.00. Does this present " you with an arbitrage oppofiunity? if so, please expiain the exact arbitrage strategy you would use to profit from this Isis—pricing (5e, cleariy identify how much you would buy and sell of each bend involved in your strategy), and haw much week! you make each time you performed this arbitrage trade. If this situation does not present you with an arbitrage eppoflnnity, please explain why not. \: W53 a»: Mme mew‘ie» a“ Wm“ (*“M‘ “9“ ‘3 W M“ ‘1: we MBHH? whwix 35 fizefle- 83m a? e we»: flaws fig *3“) e 5 "mg; 3% en refiuwtiw fig fies-«*5 “% M a: e a}, m We e. We at We“: (“QM‘ 'f“ 5M “3 ’3 Ruse 31 wmxé Sex! g ef sen/‘5 “1 ewes £15 2‘1. e“? M5 g?“ “{‘W “M5 Wié‘ efiw M h gem m figéwmi 9* M {if ,- d){2 marks) Assume that Bend 3 trades for the price you found in (b). What is its YTM? iwe ‘= Keeée {l *z‘f E1 r = b‘ iweéeé‘mi ./ i‘fifl 1 Whine ‘3‘; @3 marks) Assume that you netice that a two~year, $1,060 face value, zere-ceupon bend issued by {EM is primed at $780.00. Does this fact, cembined with the introduction to this question, present you with an arbitrage opportunity? Ifso, please expiain the exact arbitrage strategy you would use to profit frem this miswpricing (Le. cleariy identify how much you wouid buy and sell ef each bond inveived in your strategy), am! haw much weuid you make each time you performed this arbitrage trade. Ifth situation does .1301 present you with an arbitrage opgertunity, piease expEein why not. Ne 1. ma EGM gm wit {5QO am weave»? gy-gxeiwfivg gamma! ‘Femie. 5:5 M M\ a“ a e»? final. W411 5w gig/Nev a Mae? 3 ~ , » ‘ ‘s w - WK a gem {me am mm «s m m fag M fie: {were W44» ,9” x3 =\ y&; ‘ Sine. MRS 33m he be {$5 mm fig (W? W 35% {Wax $1 Emmi. {E}- f Page 9 of 9 ...
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This note was uploaded on 04/24/2010 for the course COMM 298 comm 298 taught by Professor Briangraham during the Spring '10 term at UBC.

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Comm 298 PastMidterm1 - 20:3 #2005 MT Question 1{21...

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