Midterm 2 Study Guide

# Midterm 2 Study Guide - Be aware the followings for you...

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Be aware the followings for you exam Exam #2 is given onlll4l200Sl No need of scantron. You must have a calculator. You must use 9 digit decimals for your calculator. Look at the chapter 4 for the digit format. Incorrect answer due to rounding up middle step numbers will Number of questions for exam #1 for each chapter first handout (1/3) for have only 507o credit. f,i Conceptual Computational Chapter 6 3-4 3-4 Chapter 7 t-2 3-4 Chanter 8 5-6 4-5 Total 20 - 25 + bonus questions (3-4) Points of computational problems are mostly larger than those of conceptual questions. Conceptual questions include a. Definition type questions b. True /False type questions c. Multiple choice type questions like in the quiz #1. Opportunity of bonus points a. For bond valuation problem, drawing exact time line: + 0.5 each b. For bond valuation problem, using formula for computation: +0.5 each c. Three to Four bonus computational questions about (-- \i l1 I lq I i:Or-J r) c.\,* -- I Ivur + r',

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IMPORTANT ! formulas vou have to memorize them. Bond value is Vd -- INT The stock price at the period of t is F, : D'*' r -o "s6 Coeffrcient of Variation is CV (X\ = o(x) E(X) Probabilities are qiven Probabilities are NOT siven Mean E(X) = PrX, + P2X2 + "'+ P*X, E(x)=LaL# Variance vAR(x) = n(X | - E(X))' +... + P*(X * - E(X))' (x - E(X))' +-..+(X N - E(x))' VAR(X): N-l Standard deviation 6(x) = [email protected] 6(x) = JnAR(n
Conceptual questions preparation Findine: If coupon rate (100/1000) = ra =lOVo over the whole period, the PV doesn't change and the PV is equal to the FV (or M, par value). In this case, the bond is called par bond. Finding: If ra < coupon rate, then the bond price increases and thus the bond sell at a premium. The bond is called premium bond. Finding: this shows that even if ra * coupon rate, the market value of a bond always converges to its par value as its maturity date approaches. Finding: Total rate of return is qual to the market rate of return (r) even if coupon rate > f7. Finding: ff coupon rate < r4 , then the bond price decreases and thus the bond sell at a discount. The bond is called discount bond. Finding: The market value of a bond conv€fges to its par value as its maturity date approaches even ifcoupon rate I r4. Finding: Total rate of return is equal to the market rate of return (rd) even if coupon rate < f4. Finding: YTM = the market rate of return on the bond (ra) = curr€nt yield + capital gain yield. Finding: The longer the maturity of the bond, the greater its price changes in response to a given change in interest rates. The risk that reflects changes in a bond price to which investors are exposed is called 'interest rate (price) risk'. The premium due to interest rate risk is called maturitv risk premium.

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Findings: a. Given the same expected ROR, The asset with less risk Qess standard deviation) is preferred. b. Given the sarne measure of risk (the same standard deviation), the asset with large expected ROR is preferred.
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