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Unformatted text preview: Question 5 (11 marks) Suppose the date is 2008 and the Canadian Government is going to introduce a new 2 year
annual coupon bond called the Canada 2010 Bond. Money raised from the issue of this bond
will be used to help fund the federal government’s share of the anticipated cost overruns of the
2010 Olympics in VancouverNVhistler. While this bond bears the same risk as any other Government of Canada bond, it is unusual in that it pays two annual coupons of $2,010 and has
a face value of $48,000. There are currently two other Government of Canada Bonds available in the marketplace with
the following information: Bond 1: 4% annual coupon, face value = $1000, 2 years to maturity, current price = $959.78
Bond 2: 5% annual coupon, face value = $1000, 2 years to maturity, current price = $974.48 (a) (6 marks) Using the information from Bonds 1 and 2, provide a detailed and clear procedure
that will replicate the Canada 2010 Bond. In particular, be sure to specify what quantities of
Bonds 1 and 2 you would buy or sell to replicate a Canada 2010 Bond. 0).; 0 it .7, ) {'— 31}: {fl l l 7 8 l 2 :‘ l0 (30.0. A910 5030 lm
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P t l/ " t ‘ q (3% BLUE», L) 2:. q (b) (1 mark) Using the replication strategy above, what price should the Canada 2010 Bond
sell for? Pym ; 3907?}! + ‘3‘, :lﬂLiéxg P l Page 9 0f 10 (c) (4 marks) Suppose the government wants to sell the bond for a price substantially higher
than the price determined in part (b) above. Would this be a valid strategy? Circle the
correct response and explain. Yes ® \ Explain: Please do not write below this line. Page 10 of 10 Question 1 ( 26 marks) (a) (3 marks) A company is considering an investment project that will pay $1,300 one year
from now and $500 two years from now. The present value of these cashflows at a
discount rate of 7% per year is $1651.67. If the discount rate was 10%, would the
present value of these cash flows be higher or lower? Explain. Do not calculate. 4“: PM‘Tcht IT”: fhéﬁt (fly—1r; {OH}? (lv'lbLl/‘rv{ be Nklglcn‘s'lnf I f ‘(n' (b) (4 marks) You buy a new $25,000 car and will make monthly payments at the end of
each month for 6 years. If the APR is 8% per year, compounded semiannually,
determine the value of the monthly payment. I ‘ 3‘2 l \ l It‘ll]; h36X[zLC?—72_ *l .0214 ' l/V: A[l‘(w' i= "ilf‘tOk'W : ' 4L}.LJ(‘,‘L\( \‘ 67i—iii‘é'5" $3“11’33cu. 6.4. < Pars/(“"0 (c) (2 marks) What are agency problems in a firm?
‘ . x: \ ("BC i gt 5“ (\i‘.’ l (54. ’ :2 (MAC W" :‘NU I Page 1 of 10 (2 marks) Explain what is meant by interest rate risk. ( "J 4 Q (11 l\ \L“”;‘~{' t0 CL” U) “1 l/\ I“ V13 '
, , , . . d (/7 g \. \: (j i, l! 'C g (L l l; ’i 5} ‘ i301” ‘ ‘4‘: ‘v: ( ° ’ (2 marks) An investor buys a stock for $12.00 and 4 years later sells it for $19.00. If no
dividends were received over the first 3 years but the investor received a dividend of
$2.00 at the end of the fourth year, calculate the annualized realized rate of return. 0
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/ . i (3 marks) What makes stocks more difficult to price than bonds? Please use point form
when answering this question. k ‘ 5* I, i a ‘2 ‘1 “g V /
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lo Wva (2 marks) An annual coupon bond with a coupon rate of 10% is currently selling for
$ 1,077.88. If the face value of this bond is $1,000 and there are 6 years remaining to
maturity, which one of the following yields to maturity is correct. A) 0.145 10775237 : tool) l“ ( l * Tia1f lm:~( ltd—C
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N" ,("T ‘ Page 2 of 10 (h) (3 marks) Suppose you invested money at 6% per year in year 1 and 8.5% in year 2. In
addition, suppose that inflation was 2% in year 1 and 3.2% in year 2. At the end of the 2
year period, how much has your purchasing power increased/decreased? Q I mex‘wkwNWHil 3min sbfb ; paid /
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immeoﬁe by Vi, ~22 \e/ (i) (5 marks) You make monthly payments of $95 at the end of each month into an account which pays 9% per year, compounded monthly. How many monthly payments would you
need to make until you had at least $18,000 in this account? 0 at r,
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5 I 'N 75w?» XH'JV‘ (Qw/(W’N/ inﬁll VOL” Page 3 of 10 Question 2 (12 marks) The Roberts family has twins, Amos and Becca. Every month, since the day they were born, the
Roberts family has received§200jrom a relative. This money is to be put in the bank and be
given to the children on their 18‘“V,birthday. The laggayment will arrive on the twins 18‘“ birthday.
The Roberts family has decided that to simply the monthly banking activities, they will put the first $200 amount in Amos’ account, the next $200 amount into Becca’s account and alternate
like this until the twins 18‘“ birthday. (a) (b) (7 marks) If the money can be invested at 0.5% per month, how much will be in Amos’
account on his 18‘“ birthday? (Tar 7' n (Slots; “3 (5 marks) Without using any calculations, would Becca’s account balance on her 18‘“ birthday be the same, lower or higher than her twin brother’s? Circle the correct
response and explain. Same Low?) Higher
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t), kwnkjc},  (yie’M):{\l'tf‘ ;(C€[€// ) Question 3 (15 marks) Marvin paid $1.72§§;0_Q_,e_ight years‘ago to purchase a Government of Canada bond with a face
value of $3] The bond had eighteen years to maturity at the time Marvin bought it, a couponiateji 91/9, with coupons p_a_i_d semiannually, and a yield to maturity (YTM) of 6.5%.
When Marvin bought this bond, he intended to hold it to maturity. Now, eight years later, Marvin needs cash and has to sell the bond. The bond market now
requires a YTM on the bond/of/ALQ‘ZQ: Assume that Marvin sells the bond today, just after the
bond has paid its most recent coupon. Over the eight year holding period, Martin deposited the bonds coupon payments in a SuperSaver bank account earning 3% APR, compounded
monthly. (a) (5 marks) Calculate the price at which Marvin sells the bond today. 0 it: p,  b IOXZ l l 20
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l, r “13 0‘ CR: \LO S El“ (1074‘) 4 l~ (l “h “k C w 145 (b) (g/marks) Marvin’s cash needs forced him to sell the bond today. Did this hurt Marvin
financially? Please provide a brief explanation. )‘QO TQMJ 6‘0 V‘ﬁ' £71 ‘ F(0? th‘i HWQHF/‘Jlry (.:[I";CC. Kyla l E2131 'T ‘“= H [Lu {rt lugit/ [41: l mu, . . purcl l 7 Page 5 of 10 © (8 marks) Calculate Marvin’s realized holding period rate of return on this bond investment. How does it compare to the bond’s purchase date YTM of 6.5%? Please give a brief economic
explanation for your result. ﬂ. _ .07) \R
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[ A x >\ / l «it, WW 1 Q m _. C ( Ct (/{I( lp0§01i ‘/ \1 “ ‘{‘\»/_ «if l M JV ‘ M LA 01C Wt \Jorcé ita+€ WM W 6 "(V Page 6 of 10 Question 4 (16 marks) While vacationing in Mexico, Carl has an opportunity to purchase a real estate investment,
called a 10~year TimeShare. Two different Time—Share deals are available: Deal A requires
only [payment of $26,000 to be paid at the beginning of the lgyea‘rj'ime—Share; Deal B
requir§aWWﬁ3aTrWeﬁt to be paid at the beginning cf the 10 year Time—Share AND a
$800 per year “fee”, payable at the beginning of each year for which he has use of the Time— share. Except for the financial requirements set out above, both TimeShare deals offer the
same benefits. You may assume that both Carl and the Time—Share company use a rate of 9 °/o per year, compounded annually to discount their cash flows. You may also assume that this rate is in
effect for all parts of this problem . (a) (7 marks) Which is the better economic deal for Carl to take? Explain and provide
convincing numerical evidence, ‘\ f i.
Ljqu A f) jzéx’“ \& Page 7 of 10 Carl is not yet sure that he wants to buy a TimeShare, but assume that if he does, he will
purchase Deal B. To encourage him to purchase Deal B, the salesman offers the
following incentive:
“Our Time—Share company will promise to repurchase your TimeShare from you
at the end of year 10. Our repurchase price will be your original down payment of
$20,000 increased at the rate of 4% per year. You would be making money on
this deal because the repurchase price will easily exceed the $28,000 in total
costs that you paid.” (i) (1 mark) Calculate the exact dollar re—purchase price that the salesman is offering. ":1. g 3 .2C) , ‘ __ ﬂ, “.0, .._w....,_,._..~‘ \ if}. ('QQK‘K ‘ i (ii) (1 mark) Show the calculation the salesman used to arrive at $28,000. \ r
i 800 X [0 Pat/punts; :Jchcwﬁ.‘ :; '\ V (iii) (3 marks) Comment on the salesman’s claim that the repurchase price will exceed
Carl’s costs. No calculations are required. /’ "x . v l ,
KW idolxi’wi‘d" a luau ‘ ‘ r “‘4 ‘[ lvww W9: HO) +CADxr I’V/C‘ WW ‘ 2+ vw. Di (7/ (iv) (4 marks) If Carl is only concerned with the economic aspect of this TimeShare
investment, should Carl invest in the TimeShare? By how much will he be better off or
worse off? Explain and include appropriate calculations as needed. Page 8 of 10 Commerce 298 Midterm Examination
Sections 201, 202, 203, 204, 205,206
FEBRUARY 28, 2006 PLEASE READ THE FOLLOWING: 1 . This examination consists of 10 pages of questions plus this cover page. Please check to
ensure this paper is complete. 2. No candidate shall be permitted to enter the examination room after the expiration of 1/2
hour, or to leave during the first 1/2 hour of the examination. Candidates are not
permitted to ask questions of interpretation. is: “What does this mean?” 3. Individual calculators permitted (graphing calculators, TI 83 etc  are NOT permitted). No
other materials are allowed. Please show ALL work on this exam paper in the space
provided. 4. Cell phones must be turned off and are not permitted to be in view or be used as a watch
during this exam. 5. Detailed work must be shown to receive credit. You must clearly show all formulas
complete with appropriate values for the variables and calculations to support your
answers. No credit for answers only! Routine arithmetic calculations should NOT be
shown. 6. Time: 90 minutes Last name If s ‘ ~ ' First name '35 1—1 {ffCi Student Number 2: Signature: Section 2, (I Maximum
Possible Maximum
Suggested
Time
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