F08 final 171a

F08 final 171a - Version A Name (please print) :_AMR_...

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Version A Name (please print ) :________AMR______________________________ Business 171a Professor Reza Fall 2008 San Jose State University Final exam Instructions and notes : I. Please put your name on BOTH the scantron and this exam. If your name is missing from either, you will receive ZERO on the exam – no exception and no changes afterwards. II. Mark your test version (A, B, …) on the scantron. If the version is missing your scantron will be assigned a version at random – no changes are made afterwards. III. If you leave the classroom you cannot return to complete your exam IV. This is a closed-book, closed-notes exam. Do not consult others. You may use a calculator. No cell phones for any reason. V. There is one correct answer to each problem. Multiple answers receive zero point. VI. Unless specified otherwise, approximations should be rounded to 2 places after the decimal. If the answer has 3 digits after the decimal, you may round it to 2 places VII. The markings on the scantron are final, even if you make a mistake in transferring your answer to the scantron. VIII. Unless specified otherwise, a debt security has a face (par) value of $1,000 IX. Unless specified otherwise, assume that a. investors maximize their net worth (i.e., they are “rational”) and firms maximize their common shareholders’ net worth. b. all markets are efficient. c. firms are typical of the industry in which they operate. d. Answer your questions assuming that the current financial crisis has not occurred Insert Interest rate parity: S F = W D i i + + 1 1 , where F = forward forex rate (in $ per foreign currency) S =Spot forex rate (in $ per foreign currency) i D = US interest rate i W = foreign interest rate PV of Annuity: PV of annuity = C + - N i i i ) 1 ( 1 1 where C = regular periodic payment i = the annual rate of interest N = the number of periods payments are made/received Structure of Interest Rate s: (1+ R N ) N = (1 + R 1 )(1+ r 2 )( 1+ r 3 ) ….(1+ r N ), where R N = the current (spot) interest rate on a N-year loan, and r t = the forward/expected interest rate on a one-year loan that is t (t= 1,2,. ..,N ) years in the future Alternatively, you may use: R N = ( R 1 + r 1 + r 2 + ….+ r N ) / N ____________________________________________________________________ 1
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1. You buy a bond for $950. The bond pays interest of $100 at the end of year 1, at which time you sell it for $980. The rate of return you expect to earn on this investment is approximately (a) 8.00% (b) 10.53% (c) 10.20% (d) 13.68% 2. Consider two bonds A and B. Both have the same YTM and the same maturity. But A pays a coupon rate of 12% while B pays a coupon rate of 8%. (a) Without knowing the exact YTM we cannot determine the bonds’ durations
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F08 final 171a - Version A Name (please print) :_AMR_...

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