PracticeSet1

PracticeSet1 - Finance 261 Practice Set 1 Supplementary...

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Finance 261 Practice Set 1 – Supplementary Examples 1. Following a 1% increase in wholesale interest rates, most banks increased their lending rates from 9.3% p.a. to 10% p.a. (both compounded annually). Bank A, however, decided to maintain its existing stated interest rate of 9.3% and instead increased the frequency of compounding from annual to quarterly. The effective annual interest being charged by Bank A is (a) 9.63% (b) 9.48% (c) 9.25% (d) 10.00% (e) 9.3% 2. For each of (a) and (b) below state which security should sell at a higher price. a) A 10-year Treasury bond with a 9% coupon rate or a 10-year Treasury bond with a 10% coupon rate (all other things being equal)? b) A 3 month T-bill with a discount yield of 6.1% or a 3 month T-bill with a discount yield of 6.2%. Both bills sell at a discount from their face values. Note: No computations are necessary to answer these questions. 3. Belden Corporation issues a 90 day bank bill with a face value of $500,000 when bank bills are priced to yield 11.5% p.a. The amount (value) of funds the company a. borrows is $486,212.87 b. lends is $486,212.87
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