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PracticeSet1Solns

PracticeSet1Solns - Finance 261 Practice Set 1...

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Finance 261 Practice Set 1 – Supplementary Examples Solutions 1. (a) % 63 . 9 09629 . 1 4 093 . 1 4 = + 2. a) The bond with the highest coupon interest rate (10%) would sell at a higher price. It offers a higher return, all other things (e.g. risk) being equal. b) The T-bill with a discount yield of 6.1% will sell at a higher price since its discount from face value is less than that of the 6.2% T-bill. 3. a 87 . 212 , 486 $ ) 365 90 x 115 . 0 ( 1 000 , 500 = + The company is borrowing 4. a 5. (a) If interest rates are expected to fall, bill prices will rise in response. To capture this windfall gain you should buy at current rates 10.9% p.a. and hold until interest rates drop- then sell at the higher price. (b) A 90 day bank bill is a contract which promises to pay you an amount equal to the face value of the contract in 90 days time. Simple interest is used to discount the cash flows when the time to maturity is less than one year. Thus the value of the bill (and amount lent is) is: 37 . 913 , 486 $ ) 365 / 90 x 109 . 0 . 1 ( 000 , 500 $ Value = + = 6 (a) A limit order to sell is placed above the current market price. If the limit order
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